Part I: Short Answer/Problem Solving

Directions: In the following five scenarios (a)-(e), you are asked to apply the supply and
demand analysis to determine the effects of certain economic events on the markets given.
To receive credit, identify which curve is affected from the event discussed in the question
and then SHIFT the appropriate curve. Also clearly mark the initial and final equilibrium
price, equilibrium quantity pairs as (P1, Q1) and (P2, Q2) and indicate how they changed
(higher, lower)
1. (25 points)

a) Demand and supply curves for eggs are given in the below
graph. Suppose the price of chicken feed increases. Find the
effect of this change on the equilibrium price and quantity of
eggs.

MARKET FOR EGGS

S1
P
Equilibrium Price:
Equilibrium Quantity:

D1
Q

b) Demand and supply curves for tortilla chips are given in the
below graph. Suppose the price of salsa, a complementary good
decreases substantially.
Find the effect of this change on the equilibrium price and
quantity of tortilla chips.

MARKET FIR TORTILLA CHIPS

S1
P
Equilibrium Price:
Equilibrium Quantity:

D1
Q
c) Demand and supply curves for avocados are given in the below
graph. Suppose researchers prove that the oils in avocados are
harmful to human health. Find the effect of this change on the
equilibrium price and quantity of avocados.

MARKET FOR AVOCADOS

S1
P
Equilibrium Price:
Equilibrium Quantity:

D1
Q

d) Demand and supply curves for oranges are given in the below graph.
Suppose exceptionally good weather provides a much greater than
expected harvest. Find the effect of this change on the equilibrium
price and quantity of orange.

MARKET FOR ORANGE

S1
P
Equilibrium Price:
Equilibrium Quantity:

D1
Q
e) Demand and supply curves for gasoline powered cars are given in
the below graph. Suppose price of electric powered cars, a substitute
good, decrease substantially. Find the effect of this change on the
equilibrium price and quantity of gasoline-powered cars.

MARKET FOR GAS POWERED CARS

S1
P
Equilibrium Price:
Equilibrium Quantity:

D1
Q

2. (6 points) Consider the five pillars of economic thinking we learned in class. Write the
number that corresponds to the economic thinking next to the scenario that illustrates the
principle best.

1) Everyone faces trade offs.

2) The cost of something is what you give up to get it.
3) Everyone responds to incentives
4) Trade makes both parties better off.
5) People make decisions at the margin.

_____Patrick bought a highlighter from Jill for $2. Patrick would have been willing to pay
$2.50 for the highlighter, and Jill would have been willing to sell the highlighter for $1.25.

_____Jeff Bezos is known not to schedule early morning meetings so he can spend time
with his loved ones.

_____LeBron James has moved from one team to another multiple times requiring him to
relocate to another city. Each time LeBron chose to use movers instead of taking care of
moving himself, as he knew that he would have given up practice and game time had he
taken care of the moving himself, which would have cost him millions of dollars.

_____Having two exams in one day, Mary had to decide how to allocate 6 hours of study
time to the two exams night before. For the last hour left for studying Mary considered the
additional benefit she would receive from studying for each course and allocated her last
hour to the one that gave the highest benefit.

_____The psychology course Dillon takes has weekly quiz on the reading assignments
whereas the humanities course doesn’t. As a result Dillon reads his psychology textbook to
prepare for the weekly quiz but doesn’t read his humanities textbook at all.
 3. (24 points) Ann and Tracy both work 8 hours per day in their jewelry shop, where they
produce bracelets and necklaces. Their production possibility frontiers are given below.
Necklaces Necklaces
5 5

4 4

3 3

2 2

1 1

0 0
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Bracelets Bracelets

TRACY ANN

(a) For Tracy, find an unattainable combination of Bracelets and Necklaces and mark it on
the graph above, label it as point A and write it below:
A = ( ______ Bracelets , ______ Necklaces )

(b) For Ann, find and inefficient combination of Bracelets and Necklaces and mark it on the
graph above, label it as point B and write it below:
B = ( ______ Bracelets , ______ Necklaces )

(c) Who has the absolute advantage in producing Bracelets?

(d) Who has the absolute advantage in producing Necklaces?

(e) What is the opportunity cost of producing 1 Bracelet for Tracy?

(f) What is the opportunity cost of producing 1 Bracelet for Ann?

(g) Who has the comparative advantage in producing Bracelets?

(h) What is the opportunity cost of producing 1 Necklace for Tracy?

(i) What is the opportunity cost of producing 1 Necklace for Ann?

(j) Who has the comparative advantage in producing Necklaces?

(k) Draw the joint PPF for the jewelry shop.

Necklaces
10

0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Bracelets

Answer part (l) and (m) using the joint PPF you have drawn in part (k).
(l) Is the point (6 Bracelets, 5 Necklaces ) efficient? (Please answer yes or no)

(m) Is the point (11 Bracelets, 3 Necklaces) possible? If yes, explain how this point can
be achieved:
Tracy produces ____ necklaces and _____ bracelets and
Ann produces ____ necklaces and _____ bracelets.
 PART II: MULTIPLE CHOICE QUESTIONS
1. Enrico got a promotion in his job, which doubled his annual income. As a result his
demand for Hot Pockets increased. From this information we can conclude that
a. Hot Pockets is a complementary good for Enrico.
b. Hot Pockets is a substitute good for Enrico
c. Hot Pockets is an inferior good for Enrico.
d. Hot Pockets is a normal good for Enrico.
e. None of the above

Wheat
B
D

C
Planes

Figure 1: Production Possibilities Frontier For USA, 2010

2. The Production Possibilities Frontier for the United States for wheat and planes are given
in Figure 1. Which of the following statements is FALSE?
a. At point C, the resources of the economy are fully employed
b. At point A, the resources are used inefficiently.
c. At point B, all of the resources are allocated to Wheat production.
d. Point C is an inefficient production point.
e. Point D can be achieved with economic growth or technological change.

Bushels
of 400
Wheat

350

300 B
250

200

150

100

50

0
0 1 2 3 4 5
Plane

Figure 2: Production Possibilities Frontier for Micronesia

3. The Production Possibilities Frontier for Micronesia is given in the Figure 2. The
economy is currently at point B. What is the opportunity cost of producing 1 more plane?

a. 300 bushels of wheat

b. 100 bushels of wheat
c. 350 bushels of wheat
d. 150 bushels of wheat
e. 50 bushels of wheat

4. Zeke quits his $50,000 a year job to start an economic consulting business. To pay for the
salary of his assistant and for the supplies he cashes his $40,000 certificate of deposit, which
was paying, 5% interest a year. What is Zeke’s opportunity cost of starting his own
business?
a. $65,000
b. $41,500
c. $92,000
d. $71,500
e. $30,000

5. Which of the following is an example of a positive statement?

a. Government is spending too much on defense.
b. The minimum wage ought to be abolished.
c. US workers deserve more unemployment benefits.
d. The minimum wage does not create unemployment among unskilled workers.
e. A little bit of inflation is worse for society that a little bit of unemployment.

6. Production possibilities frontiers are usually bowed outward. This is because:

a. it reflects the fact that the opportunity cost of producing a good falls as one
produces more and more of it.
b. it reflects the fact that the opportunity cost of producing a good increases as one
produces more and more of it.
c. the more resources a society uses to produce one good, the fewer resources it has
available to produce another good.
d. the more resources a society uses to produce one good, the more resources it has
available to produce another good
e. of the effects of technological change.
7. Demand and Supply for Coffee Beans are given in the graph above. If the price in this
market is currently $14, there would be
a. surplus of 20 units and price would tend to fall
b. excess supply of 40 units
c. shortage of 20 units and price would tend to rise
d. excess demand of 40 units
e. no shortage or surplus
8. Which of the following demonstrates the law of demand?
a. Ally buys fewer muffins at $0.75 each than at $1 each.
b. Dave buys more donuts at $0.25 each than at $0.50 each.
c. Sean buys more pretzels at $1.50 each since he got a $1 raise at work.
d. Lea buys fewer Snickers at $0.60 each since the price of Milky Ways fell to
$0.50 each.
e. Tommy’s demand for ice-cream decreases as a result of him following a new
diet.
9. Which of the following statements is correct about the law of supply?
a. as the price of dog chews increases, the quantity of dog chews supplied
decreases
b. as the price of dog chews increases, the supply of dog chews shifts to the
right.
c. as the price of dog chews decreases, the supply of dog chews increases
d. as the price of dog chews increases, the supply of dog chews increases
e. as the price of dog chews decreases, the quantity of dog chews supplied
decreases

10. On the graph on the right, the shift from D to D could be

1
2

caused by

a. a decrease in the price of a complement.

b. Advances in technology.
c. a decrease in price of the good
d. a decrease in the price of a substitute
e. a decrease in the number of buyers
11. For economists, normative statements are
a. statements which establish production goals for the economy
b. statements about the desired state of the economy
c. prescriptive, making a claim about how the world ought to be
d. descriptive, making a claim about how the world is
e. statements about the normal conditions of the world

12. Beef is a normal good. You observe that both the equilibrium price and quantity of beef
has fallen over time. Which of the following would be most consistent with this
observation?
a. The price of chicken has risen.
b. Consumer tastes have changed so as to prefer beef less than before.
c. Consumers have experienced an increase in income.
d. The demand curve for beef must be positively sloped.
e. Price of steak sauce has fallen over time.

Price Quantity Quantity

demanded supplied
8 150 90
9 130 100
10 110 110
11 90 120
12 70 130
13 50 140
Table for Question 13: The market demand and supply schedules for pizza
13. The original market demand and supply schedules for pizza are given in the above table.
Now suppose that the price of flour doubles increasing the cost of producing pizzas. As a
result the pizza restaurants on campus reduce their supply by 25%. Find the new
equilibrium quantity and price of pizzas after this decrease in supply.
a. 100 Pizzas at a price of $9
b. 110 Pizzas at a price of $10
c. 130 Pizzas at a price of $9
d. 90 Pizzas at a price of $11
e. 120 Pizzas at a price of $12
14. Panel (a) Panel (b)
cups of coffee cups of coffee
7 7

6.5 6.5
J
6 6

5.5 5.5

5 5

4.5 4.5

4 L 4
K
3.5 3.5

3 3

2.5 2.5

2 N 2

1.5 1.5

1 1

0.5 0.5
M

1 2 3 4 5 6 donuts 1 2 3 4 5 6 donuts

Please refer to Figure above, Panel (a) and Panel (b). A shift of the economy’s production
possibilities frontier from Panel (a) to Panel (b) could be caused by
a. unemployment.
b. an improvement in coffee production technology.
c. an improvement in donut production technology
d. inflation
e. an improvement in both donut and coffee production technology.

15. The painting “ballet dancers in the wings” by Edgar

Degas, is one of the finest examples of impressionist art.
Which of the following curves represents the supply
curve for this original painting?

(a) (b) (c) (d) (e)

P P P P P

Q Q Q Q Q