ec 252 the mistake checking

EC-252-I01: Principles of Microeconomics

Summer 2017

Midterm Exam

Due Date: Wednesday, July 5, 2017

Name: ____yue huang _____________________________________________________

This midterm exam is due by 11:30 PM on Wednesday, July 5, 2017. You may use any outside resources (EXCEPT for other people) in order to complete it. Simply copying answers from any source, including the textbook or notes, will not be greeted with a high grade. Ignoring parts of a question is not an advisable strategy. The exam will be graded for the accuracy and precision of the economic and mathematical arguments and evidence provided. The grading will also incorporate your proper command and usage of the English language. The exam is worth 100 points in total. Enjoy!

1 (25 points) Explain the producer’s problem using as much detail as possible. Your answer should include an explanation of the problem itself, how they solve it graphically, how price changes affect production decisions, and why prices provide incentives for producers. Use both straight line (individual) and bowed out (societal) PPFs to illustrate the idea. Feel free to incorporate graphs, drawings, and diagrams relevant to the problem. Use made up production capabilities and prices if you wish, too.

Question 1

The producer’s problem is profit maximization. It is attained when the difference between the revenue gained from the sale of goods is higher than the cost of production. The higher the difference, the more the profit gained. Graphically, profit maximization is determined by checking the point where Marginal Cost (MC) is equal to Marginal Revenue (MR); MC=MR (Kreps, 2013).

Price maximum profit

Quantity

A producer can always satisfy attain their economic goals by ensuring their production remains along the Production Possibility Frontier (PPF). PPF is a graph that indicates the possible prod

A producer should always aim to maintain production within the curve.

M represents a point of insufficient production while at N, combining inputs X and Y cannot achieve that amount of goods.

Prices affect production decisions in terms of supply. That is, an increase in price motivates producers to increase amount (because more income gained) while a reduction in prices makes producers reduce production (because income reduces). Also, the price of inputs also affects profits because it can either reduce profits (when they’re high) or reduce it (when they are high). Prices act as an incentive to producers because it’s through it that profit is made. That is, one gets an appreciation for investing in the production process.

2 (25 points) Explain the consumer’s problem in as much detail as possible. Your answer should include an explanation of the problem itself, brief description of ICs and their properties, how consumers become “happier,” how price or income changes can affect their purchasing decisions, and why every consumer solving their consumer problem individually creates a Pareto efficient outcome for society. Feel free to incorporate graphs, drawings, and diagrams relevant to the problem. Use made up income, prices, and happiness levels if you wish, too.

Consumer problem: The notion of perfect information is fabricated extremely on the design of the choice problem the same way it is in the causal choice theory thus a number of alternative simulations handle the consumer as rational though unclear on the goods i.e. how a specific food may taste and how well a onslaught product may perform and some goods may be experience goods in a way that the consumer can best learn about through experiencing the good thus the consumer may want to buy some now and decide well along whether to buy more or not therefore this condition situation may require a distinct formulation as the same way when the agent reasons that high price goods are more likely to execute in a satisfactory way so that may show quite a different formulation

utility maximization which refers to the satisfaction that a gain by using a good and/or service. It helps a person know they have gained from using their income on their expense. It is constrained by the income of an individual (one cannot spend what they do not have). Utility maximization is determined by the intersection of the indifference curve and budget line.

How price or income changes can affect their purchasing decisions

If a consumer has set an objective to buy quality products hence the prices are set conferring to the quality of products and if the consumer has an objective to raise purchases by then the sensible prices needs to be set to increase the demand of the product

The indifference curve (IC) is a graph that shows all the possible combinations of two goods that a consumer considers satisfactory when consumed. Their properties are. One, they are convex to the origin. Two, a curve above the other presents a high level of consumption that that below it. Three, the curves can never intersect. Lastly, the curves slope downwards. A budget line indicates the all the combination of goods a consumer can purchase given their income. Therefore, where the budget line and IC intersect is the point where a consumer can comfortably purchase all goods given their income and they feel they are fully satisfied by the purchase. The following graph indicates the concept.

The purchasing decisions are highly affected by the prices of goods and/or services. Since income is constant, when the price of a good increases, a person is forced to reduce quantity consumed and if the price reduces, one has can purchase more goods at a certain price. For example, having a disposable income of ten dollars and the price of a loaf of bread is 1$, one can purchase ten loaves. If the price increases to 5$, one will be forced to purchase two loaves and if it reduces from 1$ to 50 cents, one can purchase twenty loaves. Therefore, price is a factor that dictates quantity consumed.

A person solving their consumer problem individually occurs when one tries to increase only their income. In such a situation, producers may decide to increase the price of a good cause someone can comfortably afford it.

3 (15 points) Why are prices awesome? What relationship do prices have to the consumer and producer problems, and how do prices serve as the “glue” that connects that two problems and brings about what economists call equilibrium? Explain Milton Friedman’s description of the market for pencils and how it ties into the consumer and producer problems.

Question 3

Price is important because it determines the amount of goods and/or services supplied in the market; low prices low supply while high prices high supply. Also, it affects quantity demanded by consumers; high price low demand while low prices high demand. The producer problem of profit maximization is affected by the prices of products. That is, when goods are sold at high prices, profit is high while when they are sold at low prices, profit is not maximized. Also, the prices of inputs affect the cost of production: low input prices, low cost of production thus high profit and vice versa.

The consumer problem of utility maximization is already affected by prices that is, high prices of goods reduces the amount a person can purchase while with low prices, an individual can purchase more goods thus maximizing their utility. Through the interaction of consumer’s and producer’s problems, a concept known as equilibrium is made. It represents two graphs (supply and demand) and their point of intersection represents fulfillment of producer’s and consumer’s problems. According to Case, et al, one can comfortably purchase the desired good while a seller makes a profit at the equilibrium: all individuals gain from the economy.

The needs of the producer and consumer are responsible for driving a market. That is, when a person demands for a good, a seller is forced to manufacture it. Through continued demand for a good, a producer’s concerns are met while the producer aims to give a product that meets the consumer’s satisfaction.

4(15 points) Devaughn and Grace can produce forks and spoons according to the following schedule:

	Devaughn	Grace
Forks	24	39
Spoons	12

1. Who has an absolute advantage in producing spoons?
2. Who has an absolute advantage in producing forks?
3. What is Devaughn’s opportunity costs of producing 1 spoon?
4. What is Grace’s opportunity cost of producing 1 spoon?
5. Who has a comparative advantage in producing spoons?
6. What is Devaughn’s opportunity costs of producing 1 fork?
7. What is Grace’s opportunity cost of producing 1 fork?
8. Who has a comparative advantage in producing forks?
9. If Devaughn makes 24 forks, how many spoons does he make?
10. If Devaughn makes 12 forks, how many spoons does he make?
11. If Devaughn makes 18 forks, how many spoons does he make?
12. If Devaughn makes 9 spoons, how many forks does he make?
13. If Grace makes 1 spoon, how many forks does she make?
14. If Grace makes 39 forks, how many spoons does she make?
15. If our society (made up of these two people) makes 15 spoons, how many forks does it produce?

1. Devaughn
2. Grace
3. What is Devaughn’s opportunities cost of producing 1 spoon?

Opportunity Cost (OC) =quantity given up/quantity gained

OC of 1 spoon=24 forks/12 spoons

=2 forks per spoon

By producing 1 spoon, Devaughn’s has to forego producing 2 forks

1. What is Grace’s opportunity cost of producing 1 spoon?

OC of 1 spoon=39 forks/3 spoons

=13 forks per spoon

Grace lacks to produce 13 forks when she chooses to produce 1 spoon.

1. Who has a comparative advantage in producing spoons?

Devaughn; he produces at a lower OC.

1. What is Devaughn’s opportunity cost of producing 1 fork?

OC of 1 fork=12 spoons/24 forks

=1/2 or 0.5 spoons per fork

1. What is Grace’s opportunity cost of producing 1 fork?

OC of 1 fork=3 spoons/39 forks

=1/13 or 0.077 spoons per fork

1. Who has a comparative advantage in producing forks?

Grace; she produces forks at a lower OC.

1. If Devaughn makes 24 forks, how many spoons does he make?

If 1 fork 0.5 spoons then,

24 forks 24*0.5 = 12 spoons given up

Therefore, spoons produced = 12-12

= 0 spoons

1. If Devaughn makes 12 forks, how many spoons does he make?

If 1 fork 0.5 spoons then,

12 forks 12*0.5= 6 spoons given up

Therefore, spoons produced =12-6

= 6 spoons

1. If Devaughn makes 18 forks, how many spoons does he make?

If 1 fork 0.5 spoons then,

18 forks 18*0.5= 9 spoons given up

Therefore, spoons produced = 12-9

= 3 spoons

I If 1 spoon produce 2 forks then,

9 spoons 9*2= 18 forks given up

Therefore, forks produced = 24- 18

= 6 forks

M If Grace makes 1 spoon, how many forks does she make?

OC of 1 spoon = 13 forks

Thus, by producing 1 spoon, 39 – 13 = 26 forks are made

N If Grace makes 39 forks, how many spoons does she make?

OC of 1 fork = 1/13

Thus, by producing 39 forks, 39*1/13= 3 spoons are given up hence,

3-3= 0 spoons are produced.

O If our society (made up of these two people) makes 15 spoons, how many forks does it produce?

	Devaughn	Grace	Combined
Forks	24	39	63
Spoons	12		15

OC of 1 spoon = 63/15

OC of 15 spoons= 15*63/15

= 63 forks given up

Thus, producing 15 spoons results to 63-63= 0 forks produced.

5 (10 points) Sernie Banders wins an election in a land far, far away, promising free stuff to the entire population. Upon taking office, he confiscates all private property in the country, outlaws the price system, and redistributes all goods in an equal manner to every member of the population. Every citizen receives the exact same allotment of transportation, housing, food, education, etc. Sernie promises to continue this regime into the future. All producers will be asked to continue their previous production levels, but their output will be delivered to government offices for redistribution immediately upon production. Using both the consumer and producer sides, explain why the future of this country is quite grim.

Question 5

Effect on consumers

When the goods are equally distributed, the income for every individual becomes the same. Since people demand goods and/or services in different quantities, some individuals will spend higher amounts of their income than others. The ones spending less will invest more (the effects of propensity to consume and spend). With time, an economic class starts to develop. Those who spend more invest less thus there property increases while those who spend less invest hence increase their wealth. At long last, the poverty gap resumes thus the policies have no effect on the economy. Also, due to prices being controlled by the government, the forces of demand and supply are affected. That is, the prices might be too low that shortage of products occurs and if they are too high, goods and/or services are produced in surplus (Marshall, 2013)

Effect on producers

When the goods are given to the government for redistribution, supply of the product is affected. That is, the state will put all the products in storage and distributes them according to the demand. Therefore, the good will always is available. This in turn affects the producers who gain from the market by altering the prices. When demand is high, producers cannot gain because they will have sold the product at a fixed price. But if the prices drop, the producers will be saved from loss because the government will have already purchased the product. In the long run, producers will withdraw from the market because profits will be less thus affecting supply.

6 (10 points) Budget constraint for 3 goods

Question 6

Budget constraint for 3 goods

1. Write down the budget constraint for a consumer who is able to purchase three goods in his economy. He can buy corn (C), wheat (W), and barley (B). The price of those items is PC, PW, and PB, respectively, and the consumer has an income of Y to spend. He will spend all of his money on those three goods

Corn

I/Pc M

Barley

I/Pb

I/Pw

Wheat

I is income

The triangle presents the budget constraint.

Any point along the triangle’s surface is the combination of all goods that the consumer can purchase using all available income.

M is the point of combination of wheat, barley and corn that a consumer can afford.

N is a point in which a consumer cannot afford to purchase any combination of the goods.

I/Pb, the point where consumer uses all income to purchase barley

I/Pw, the point where consumer uses all income to purchase wheat

I/Pc, the point where consumer uses all income to purchase corn

1. Are the following bundles of (C, W, B) affordable if PC = $6, PW = $8, PB = $4, and Y = $110? Circle the correct answer for each of the 5 bundles.

(7, 6, 5)

C (7*6) +W (6*8) +B (5*4) =42+48+20

= 110