Questions on Application of Supply and Demand - Quiz 4 | ECON 002, Quizzes of Microeconomics

Download Questions on Application of Supply and Demand - Quiz 4 | ECON 002 and more Quizzes Microeconomics in PDF only on Docsity! Principles of Microeconomics (Econ 2) Signature: Drake University, Summer 2008 William M. Boal Printed name: QUIZ #4 VERSION A “Applications of Supply and Demand” July 29, 2008 INSTRUCTIONS: This quiz is closed-book, closed-notes. Simple calculators are permitted, but graphing calculators or calculators with alphabetical keyboards are NOT permitted. Numerical answers, if rounded, must be correct to at least 3 significant digits. Point values for each question are noted in brackets. Maximum total points are 100. I. Multiple choice: Circle the one best answer to each question. [3 pts each: 39 pts total] (1) If the government wants to raise the price of corn it should try to shift a. the demand for corn to the right. b. the supply of corn to the right. c. either (a) and (b). d. neither (a) nor (b) will raise the price of corn. (2) Suppose a change in security procedures increases the time that travelers must spend in airports. By itself, this would shift a. down the supply of air travel. b. up the supply of air travel. c. down the demand for air travel. d. up the demand for air travel. (3) Suppose it is illegal to sell a certain good. If caught, the seller must pay a $500 fine. The probability of being caught is 2%. The expected punishment cost is therefore a. $2. b. $10. c. $50. d. $500. e. $1000. (4) Currently, the price of sugar in the U.S. is much higher than in other countries, but the U.S. restricts international trade in sugar. If free international trade were permitted, the U.S. would a. export sugar. b. import sugar. c. be self-sufficient in sugar. d. cannot be determined from the information given. (5) Recently, the demand for petroleum in Asia has shifted right. Since petroleum is traded internationally, this should cause the price of petroleum in the U.S. to a. rise. b. fall. c. remain constant. d. cannot be determined from the information given. (6) The price of rice in some Asian countries is higher than the price of rice in the United States. If these countries end their restrictions on international trade in rice, this change will benefit a. Asian rice producers and U.S. consumers. b. U.S. rice producers and Asian consumers. c. U.S. rice producers and U.S. consumers. d. Asian rice producers and Asian consumers. (7) Arbitrageurs buy low and sell high because they are trying to a. ensure that all consumers face a fair price. b. make money. c. enforce the Law of One Price. d. keep markets orderly. (8) Arbitrage will not guarantee that people in Des Moines and Seattle pay similar prices for a. Euro currency. b. government or corporate bonds. c. gold. d. houses. (9) Suppose the price of potatoes in Des Moines is $1.20 per pound and the cost of shipping potatoes between Des Moines and Detroit is $0.30 per pound. The market is in equilibrium if the price of potatoes in Detroit is a. $0.30 per pound. b. $0.70 per pound. c. $1.40 per pound. d. $2.00 per pound. (10) Suppose the supply of a good is plentiful today but is expected to be scarce in the future. Speculation through buying and holding inventories will tend to a. raise the price of a good today and lower it in the future. b. reduce the quantity demanded in the future. c. encourage greater consumption today. d. all of the above. e. none of the above. Principles of Microeconomics (Econ 2) Drake University, Summer 2008 Quiz 4 Version A Page 2 of 6 (11) Suppose a certain natural resource in limited supply can be stored at no cost. Assume speculators are active in the market for this resource. In equilibrium, the price of this natural resource is expected to a. remain constant. b. grow at the same rate of return as alternative investments. c. fall at the rate of interest. d. shoot up sharply when most of the resource is gone. (12) Suppose for some reason the futures price of petroleum for delivery next December were $120, but you believed that the spot price would be $100 next December. You could make money by a. selling petroleum futures now and selling petroleum on the spot market in December. b. buying petroleum futures now and selling petroleum on the spot market in December. c. selling petroleum futures now and buying petroleum on the spot market in December. d. buying petroleum futures now and buying petroleum on the spot market in December. (13) Suppose the price of a share of stock in Ginormous Corporation today is $50. We know that speculators are already active in the stock market. Assume that the stock market is in equilibrium. Then speculators must believe that the price of a share of stock in Ginormous Corporation tomorrow will be a. greater than $50. b. less than $50. c. about $50. d. cannot be determined from the information given. II. Problems: Insert your answer to each question below in the box provided. Feel free to use the margins for scratch workonly the answers in the boxes will be graded. Work carefullypartial credit is not normally given for questions in this section. (1) [Time costs: 12 pts] Commuting by bus takes 1 hour round trip but the fare is only $2. Commuting by car takes only 1/2 hour round trip, but the money cost (including parking, gasoline, and maintenance) is $10. Suppose someone values her or his time at $10 per hour. a. What is the time cost of commuting by bus? $ b. What is the total cost (time cost plus money cost) of commuting by bus? $ c. What is the time cost of commuting by car? $ d. What is the total cost of commuting by car? $ e. Which mode of commuting is the person likely to choose--bus or car? f. If another person is indifferent between these two modes of commuting, what must be the value of their time? $ per hour Principles of Microeconomics (Econ 2) Drake University, Summer 2008 Quiz 4 Version A Page 5 of 6 (5) [Effects of international trade: 18 pts] Country X and Country Y both have markets for grain. Supply and demand schedules for the two countries are given below in millions. Country X Country Y Price Quantity demanded Quantity supplied Quantity demanded Quantity supplied $1 30 0 24 0 $2 25 10 22 1 $3 20 20 20 2 $4 15 30 18 3 $5 10 40 16 4 $6 5 50 14 5 $7 0 60 12 6 $8 0 70 10 7 $9 0 80 8 8 $10 0 90 6 9 First consider the outcomes under autarky (that is, no international trade). a. Compute the equilibrium price in Country X. $ b. Compute the equilibrium price in Country Y. $ Now consider the outcomes with free international trade between Country X and Country Y. c. Compute the equilibrium price with trade. $ d. Which country exports grain? e. How much grain does that country export? million Indicate whether each of the following groups are better off, worse off, or just as well off as before, as a result of free international trade. f. Grain consumers in Country X g. Grain producers in Country X. h. Grain consumers in Country Y. i. Grain producers in Country Y. Principles of Microeconomics (Econ 2) Drake University, Summer 2008 Quiz 4 Version A Page 6 of 6 III. Critical thinking: Write a one-paragraph essay answering one question below (your choice). [5 pts] (1) Suppose the government has raised the price of cranberries by buying lots of cranberries. Now the government must decide what to do with the cranberries it has bought. It is considering four options: (i) give the cranberries away to consumers for free, (ii) sell the cranberries, (iii) store the cranberries indefinitely, and (iv) destroy the cranberries by using them for land fill. Which options will cause the price of cranberries to fall again? Justify your answer with a supply-and-demand graph. (2) Is international trade good for everyone? Who wins and who loses from international trade? Why? Consider both consumers and producers in both the importing country and the exporting country. Please circle the question you are answering. Write your answer below. Full credit requires correct economic reasoning, legible writing, good grammar including complete sentences, and accurate spelling. [end of quiz]