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Name:________________________ Class Time: ______________ Midterm # 1 “Principles of Microeconomics” NSCC - Spring 2007 Professor: Moonsu Han Total 25 points. Question 1 Bring definitions for following terms and bring one example based on our life. (Total 4 pts., 1 pt each) 1. Opportunity Cost: 2. Positive Statements vs. Normative Statements: 3. Equilibrium: 1 4. Price Ceiling vs. Price Floor Question 2 American and Italian workers can each produce 5000 bottles of wine a year. An American worker can produce 100 cars a year, whereas an Italian worker can produce 50 cars a year. Assume that each country has 1,000,000 workers. (Total 5pts, 1 pt. each) 1. Graph the production possibilities frontier of the American and Italian economies. 2. For the US, what is the opportunity cost of a car? Of wine? For Italia, what is the Opportunity cost of a car? Of wine? Put this information in a table analogous to same table as we did in our class. 2 3. Which country has an absolute advantage in producing cars? In producing wine? Which country has a comparative advantage in producing cars? In producing wine? 4. Without trade, half of each country’s workers produce cars and half produce wine. What quantities of cars and wine does each country produce? 5. Starting from a position without trade, give an example on which trade makes each country better off. 3 Question 3 Using supply-and-demand diagrams, show the effect of the following events on the market for bagels. Need to show changes of price and quantity. (Total 6 pts, 1.5 pts. each) 1. Great weather increased the amount of wheat crop. 2. The price of cream cheese falls. (Assume that we can’t eat bagel without cream cheese.) 3. New and more productive bagel making machines are invented. 4 4. Americans DO LOVE to eat bagels. (Americans taste for bagel is changed positively) Question 4 Suppose that the price of basketball tickets at North Shore College is determined by market forces. Currently, the demand and supply schedules are as follows: (Total 4 pts.) Price Quantity Demanded Quantity Supplied $4 1000 600 $6 800 600 $8 600 600 $10 400 600 $12 200 600 1. Draw the demand and supply curves. What is unusual about this supply curve? Why might be true? (2 pts.) 2. What are the equilibrium price (P*) and quantity (Q*) of tickets? (2 pts.) 5 Question 5 Use the information in the following table on the market for apartments in Boston to answer the following questions. (Total 6 pts. 1 pt. each) Rent Quantity Demanded Quantity Supplied $500 375,000 225,000 $700 350,000 250,000 $900 325,000 275,000 $1,100 300,000 300,000 $1,300 275,000 325,000 $1,500 250,000 350,000 1. In the absence of rent control, what is the equilibrium rent and what is the equilibrium quantity of apartments rented? 2. Suppose that government sets a price ceiling on rents of $700 per month. What is the new market rent per month and how many apartments are rented? 3. Assume that all landlords abide by the law. Use a supply and demand diagram to illustrate the impact of this price ceiling on the market for apartments. Be sure to indicate on your diagram each of the following: (i) the area representing consumer surplus after the price ceiling has been imposed, (ii) the area representing producer surplus after the piece ceiling has been imposed, and (iii) the area representing the deadweight loss after the ceiling has been imposed. 6 4. Assume that the quantity of apartments supplied is the same as you determined in Question 5 – part 2 ($700 price ceiling case). But now assume that landlords ignore the law and rent this quantity of apartments for the highest rent they can get. Briefly explain what this rent will be. 5. Suppose that government repealed the previous price ceiling and sets NEW price floor on rents of $700 per month. What is the new market rent per month and how many apartments are rented? 6. Suppose that government repealed previous piece ceiling and price floor and sets NEW price ceiling on rents of $1,300 per month. What is the new market rent per month and how many apartments are rented? 7
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