EXAM 1 – Principles of Microeconomics
J. Wahl – Winter 2009
Please answer the italicized parts and take the rest of the question as given. Answer the
questions as fully and precisely as you can; I give partial credit. Use the back of the page
if necessary.
1. T/F/U(ncertain) and explain, using economic concepts. Suppose that, by the end
of this century, today’s nations have consolidated into two large countries: Amerika and
Afeurasia. Amerika is better at producing electronics and Afeurasia is better at producing
handicrafts. Therefore, each country should specialize in what it is good at producing.
2. T/F/U and explain, using economic concepts. Ticket scalping forces people to
pay more than they want.
3. T/F/U and explain. A rise in the cost of producing mutton will lower the price of
wool.
4. Amid the continued increases in health care costs, many people have called for
the imposition of price ceilings on prescription drugs. Would the enactment of such a
policy be likely to make consumers better off? Please include a graphical analysis in
your answer.
5. T/F/U and explain, using supply and demand curves in your answer. In years of
bad harvests in medieval England, some charitable rich people bought up all the grain
from grain sellers and then re-sold it to the poor at half the market price. Assuming that
no inventories could be held, no foreign trade occurred, and rich people consumed no
grain themselves, the poor didn’t benefit at all by this charity; only the sellers of grain
were better off.
6. Carl and Ole are the only residents of Northfield. They trade regularly with the
outside world, purchasing caviar and selling handmade sweaters. Demand for caviar by
each is
Carl: q = 150 - 4p + 0.2Y (110) 0=150+110-4p p=
Ole: q = 65 - 3p + 0.1Y (55) 0= 65+55-3p p=
where q is weekly jars of caviar, p is price per jar, and Y is Carl’s and Ole’s joint
income. Currently, Y is $250 per week. 550
a. Sketch the market demand curve for caviar, labeling clearly.
b. Suppose caviar cannot be produced in Northfield, but market supply of caviar is
perfectly horizontal at a world price of $25. What is the equilibrium quantity? Show
your work.
c.. Now suppose Carl and Ole decide to place a tariff on caviar in order to cut their
trade deficit and to fund their expanding foreign aid program. If the tariff is set at $10
per jar, what is the new equilibrium quantity?
