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ECON102Wooten–Exam1–PracticeExamSolutions

1. D–Whenunlimitedwantsexceedlimitedresources

2. Equation1isademandcurve,andequation2isasupplycurve.DemandcurveshaveanegativecoefficientonP,andsupplycurveshaveapositivecoefficientonP.

3. Settheequationsequaltofindtheequilibriumprice.Thenplugtheequilibriumpricebackintothesupplyanddemandequationstofindtheequilibriumquantity.

25–7P=P+9

16=8P

P=2

Qd=25–7(2)=11

Qs=(2)+9=11

4. Therewillbeasurplusof8units–Plugthepriceof$3intothesupplyanddemandequationstofindthequantitydemandedandquantitysuppliedatthisprice.Youfindthatthequantitysuppliedexceedsthequantitydemandedby8units.Whenthequantitysuppliedisgreaterthanthequantitydemanded,therewillbeexcesssupply,whichisreferredtoasasurplus.

Qd=25–7(3)=4

Qs=3+9=12

5. Therewillbeashortageof8units–Plugthepriceof$1intothesupplyanddemandequationstofindthequantitydemandedandthequantitysuppliedatthisprice.Youfindthatthequantitydemandedexceedsthequantitysuppliedby8units.Whenthequantitydemandedexceedsthequantitysupplied,therewillbeexcessdemand,whichisreferredtoasashortage.

Qd=25–7(1)=18

Qs=1+9=10

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6. 1/7,Inelastic

Qd1=15Qd2=13

P1=$1P2=$3

EP=𝟏𝟑#𝟏𝟓

(𝟏𝟓'𝟏𝟑)/𝟐÷ $𝟑#$𝟏

($𝟏'$𝟑)/𝟐

EP=#𝟐𝟏𝟒÷$𝟐

𝟐

EP=#𝟐𝟏𝟒=#𝟏

𝟕

|EP|=𝟏𝟕

Thepriceelasticityofdemandisinelasticbecauseitisbetween0and1.

7. 1,UnitElastic

Qs1=2Qs2=6

P1=$1P2=$3

Es=𝟔#𝟐

(𝟐'𝟔)/𝟐÷ $𝟑#$𝟏

($𝟏'$𝟑)/𝟐

Es=𝟒𝟒÷$𝟐

𝟐

Es=𝟏

Thepriceelasticityofsupplyisunitelasticbecauseitisequalto1.

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8. 9/23,Inelastic

Qd1=12Qd2=11

P1=$4P2=$5

EP=𝟏𝟏#𝟏𝟐

(𝟏𝟐'𝟏𝟏)/𝟐÷ $𝟓#$𝟒

($𝟒'$𝟓)/𝟐

EP=#𝟏𝟏𝟏.𝟓

÷$𝟏𝟒.𝟓

EP=#𝟒.𝟓𝟏𝟏.𝟓

=#𝟗𝟐𝟑

|EP|=𝟗𝟐𝟑

Thepriceelasticityofdemandisinelasticbecauseitisbetween0and1.

9. 1,Unitelastic

Qs1=8Qs2=10

P1=$4P2=$5

Es=𝟏𝟎#𝟖

(𝟖'𝟏𝟎)/𝟐÷ $𝟓#$𝟒

($𝟒'$𝟓)/𝟐

Es=𝟐𝟗÷$𝟏

𝟒.𝟓

Es=𝟏

Thepriceelasticityofsupplyisunitelasticbecauseitisequalto1.

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10. Firmsandhouseholds

11. DemandforSierraNevadawilldecreasebecausethepriceofasubstitutehasdecreased.SupplyofSierraNevadawillincreasebecauseithasbecomelessexpensivetoproduceSierraNevada.Remembertodrawtwographssidebysidefortheseproblems,aswedidintheexamreview,todeterminetheeffectonpriceandquantity.Youcanseethatinbothgraphstheequilibriumpricedecreases,butwecannotdeterminetheeffectonequilibriumquantity.

Increase DecreaseCannotDetermine

Demand X Supply X Price X Quantity X

12. Ifhotdogsbecomemoreexpensive,peoplearegoingtobyfewerhotdogbunsbecause

theyarecomplementarygoods.

13. P=$3;Q=600–Thisisthepointwheresupplyanddemandintersect.

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14. Excesssupplyof400units–Atapriceof$4,thequantitysuppliedwillbe800unitsandthequantitydemandedwillbe400units.Thismeanssupplywillexceeddemandby400units(800–400=400).

15. Shortageof800units–Atapriceof$1thequantitysuppliedwillbe200unitsandthequantitydemandedwillbe1,000units.Thismeansthatdemandwillexceedsupplyby800units(1,000–200=800).Whendemandexceedssupply,itiscalledashortage.

16. Positive0.75.Youknowthegoodsaresubstitutesbecausethecrosspriceelasticityispositive.

Exy=%6789:;<::8=%6>9:;<::8?

= @A%BA%

= 0.75

17. Demandisinelasticwhentherearenosubstitutesavailable.

18. Inelasticbecausewearegenerallynotsensitivetochangesinpricesofgoodsthatmakeupasmallpercentofourincome.

19. 5

EP=78F#78G

(78G'78F)/F÷ >F#>G

(>G'>F)/F

EP=A#GA

(GA'A)/F÷ H#B

(B'H)/F=–5

|EP|=5

20. Relativelyelastic–Perfectlyelasticwouldbecompletelyhorizontal

21. Relativelyinelastic–Perfectlyinelasticwouldbecompletelyvertical

22. Theyaresubstitutesbecausegoodsaresubstituteswhencross-priceelasticityis

positive.

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23.

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24. $315,000

TotalRevenue=PricexQuantityTotalRevenue=$0.75x420,000TotalRevenue=$315,000

Wecanalsoillustratethisareaonthegraphbyshadinginarectangleusingthepoints$0.75and420,000units.

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25. 230burritos

Inthisproblem,weknowthe“old”valueandthe“percentagechange.”Wecanusethesevaluestosolveforthe“new”valuebelow.

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒𝑐ℎ𝑎𝑛𝑔𝑒 =𝑁𝑒𝑤– 𝑂𝑙𝑑

𝑂𝑙𝑑

0.034 =𝑁𝑒𝑤– 222

222

7.548=New–222

New=229.54

26. $250,000.Opportunitycostisthevalueofyournextbestalternative.Mike’snextbestalternativeisplayinginChinaearningasalaryof$250,000.

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UsetheGraphsBelowfortheNextSixProblems

27. P=16,Q=12

4+Q=40–2Q

3Q=36

Q=12

P=4+12=16

P=40–2(12)=16

28. CS=144,PS=72

CS=(1/2)(12)(40-16)=144

PS=(1/2)(12)(16–4)=72

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29. CS=81,PS=121.5

Quantitydemandedatapriceof$22P=40–2Qd

$22=40–2Qd

Qd=9

Pricesupplierswouldbewillingacceptataquantityof9unitsP=4+QsP=4+9p=13

CS=(1/2)(9)(40–22)=81

PS=(1/2)(9)(13-4)+(9)(22–13)=121.5

30. DWL=13.5

DWL=(1/2)(22–13)(12–9)=13.5

31. CSDecreased,PSincreased

32. Excesssupplyof9units

Quantitydemandedatapriceof$22:P=40–2Qd

$22=40–2Qd

Qd=9

Quantitysuppliedatapriceof$22:P=4+Qs$22=4+QsQs=18

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33. Thatallotherfactorsareheldconstant.

34. Thepriceofthegoodwillincrease.Ashortagemeansthatdemandisgreaterthansupply.Supplierswillraisepriceuntilsupplyanddemandareequal.

35. 11%

March=108minutes April=120minutes

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒𝑐ℎ𝑎𝑛𝑔𝑒 =𝑁𝑒𝑤– 𝑂𝑙𝑑

𝑂𝑙𝑑

𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒𝑐ℎ𝑎𝑛𝑔𝑒 =120 − 108

108= 0.11 = 11%

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36. Tofindtheequilibriumpriceandquantity,youneedtosetQd=Qs.

400–10P=100+20P

300=30P

P=10

NowyoucanplugPbackintoeithertheQdorQsequationtofindtheequilibriumquantity.Since$10isthepricethatmakesQdandQsequal,itdoesn’tmatterwhichequationyouplug$10backinto.However,agoodwaytocheckthatyougotthisproblemcorrectistoplugthevalueyoufoundforPbackintobothequations.IfbothequationsgiveyouthesameQ,itisverylikelyyouhavethecorrectanswer.

Qd=400–10(10)=300

Qs=100+20(10)=300

Willtherebeashortageorasurplusifthepriceofthisgoodis$7?Willthepriceofthegoodriseorfallovertime?Qd=400–10(P)

Qd=400–10(7)=330Qs=100+20(P)

Qs=100+20(7)=240Thereisashortageof90units(330–240=90)becauseQdisgreaterthanQs.Weexpectthepriceofthegoodtoriseovertime.

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Willtherebeashortageorasurplusifthepriceofthisgoodis$12?Willthepriceofthegoodriseorfallovertime?Qd=400–10(12)=280Qs=100+20(12)=340Thereisasurplusof60units(340–280=60)becauseQsisgreaterthanQd.Weexpectthepriceofthegoodtofallovertime.

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37. Arelativelyelasticdemandcurvewillhaveashallowslopebecauseconsumersaresensitivetochangesinprice.Arelativelyinelasticdemandcurvewillhaveasteepslopebecauseconsumersarenotsensitivetochangesinprice.

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38. Thedemandcurveisdownwardslopingwithquantityonthehorizontalaxisandpriceontheverticalaxis.Adecreaseinthegood’sownpricewillcauseanincreaseinquantitydemand.Thisisreflectedbymovementdownwardalongthedemandcurve(notashiftofthedemandcurve).Makesurethatyoulabeledyourpointsclearly,showedwhichdirectionyouweremovingalongthedemandcurve,andlabeledthecorrespondingpriceandquantitypointsontheaxeswiththenotationP1,P2,Q1,andQ2.

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39. Thesupplycurveisupwardslopingwithquantityonthehorizontalaxisandpriceontheverticalaxis.Anincreaseinthegood’sownpricewillcauseanincreaseinquantitysupplied.YoucanusetheequationQs=3+4PtofindtheQsatapriceof$1and$2.Makesureyouincludeanarrowshowingwhichwaywearemovingalongthecurve.

Qs=3+4($1)=7Qs=3+4($2)=11

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40. Achangeinthecostofinputsusedtomakeaproductwillshiftthesupplycurveinwardtotheleft.Makesuretoshowtheshiftwithanarrowpointingleft(notupordown).Shiftsofthesupplyanddemandcurvesarealwaysshownasrightorleftshifts.

41. Anincreaseintheincomelevelofthegeneralpopulationwillcausethedemandcuretoshiftoutwardtotheright.

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42. Thedemandcurveisdownwardslopingwithquantityonthehorizontalaxisandpriceontheverticalaxis.Adecreaseinthegood’sownpricewillcauseanincreaseinquantitydemanded.YoucanusetheequationQd=20–2PtofindtheQdatapriceof$4and$3.Makesureyouincludeanarrowshowingwhichwaywearemovingalongthecurve.

Qd=20–2($4)=12

Qd=20–2($3)=14

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43. Thefirstthingtodoissolvefortheequilibriumpriceandquantityforlastyearandthenthisyear.

LastYearQs=Qd6+2P=90–2P

4P=84

P=21

Qs=6+2(21)=48Qd=90–2(21)=48

P*=21,Q*=48

ThisYearQs=Qd6+2P=138–2P

4P=132

P=33

Qs=6+2(33)=72Qd=138–2(33)=72

P*=33,Q*=72

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44. 1.5ElasticEP=

HA#GAA(GAA'HA)/F

÷ ^#_(_'^)/F

=–1.5

|EP|=1.5

45. 0.15InelasticEP=

G`A#FAA(G`A'FAA)/F

÷ GB#GA(GB'GA)/F

=–0.15

|EP|=0.15

46. 1UnitelasticEP=

F,AAA–G,AAA(F,AAA'G,AAA)/F

÷ F_#_A(F_'_A)/F

=–1

|EP|=1

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47. Surplusof26units

Qd=18–2($8)=2

Qs=4+3($8)=28

Qs>Qd=Surplusof26units(28units–2units=26units)

48. Shortageof19units

Qd=55–4($5)=35

Qs=11+$5=16

Qd>Qs=Shortageof19units(35units–16units=19units)