Microeconomics

Midterm Examination

Fall 2024

Instruction:  Follow the instructions in each part of the midterm examination to answer the questions on the exam. If you are timing yourself, each question should take you on average no longer than 20-minutes to answer.

There is no need to rewrite each question, you may write your answers on the lined pages included at the back of the midterm examination. Be certain to include  the Part and Question  Number  for  each of your answers, and to incorporate every step instructed in the question into your answer. I will be reading your answers critically for the content.

If you want to receive extra credit you may answer additional questions on the midterm examination after you have answered the required questions in each part of the exam.

Your completed midterm examination should be submitted as hardcopy in class on Wednesday, October 23, 2024.

Part One:  Key Principles (25 Points)                                                                                 /                   

Key principles provide foundation for understanding a discipline. Briefly, discuss the following key principle and its role in microeconomics. The discussion should be no less than 250 words. Your discussion must include content from the related chapters, the lecture notes, and digital media archive.

1.)            Scarcity and Choice

Understanding  what  the  market  system  does  well  and  what  it  does  badly  is  essential  for  developing solutions to the fundamental economic problem: how to best manage the resources of society despite their scarcity. As a result, all economic decisions involve trade-offs. A well-functioning market system facilitates such decisions by assigning an input to where it will best serve society. The supply and demand model show how a competitive market behaves. This model is the most basic tool used by economists to measure and illustrate how the interactions in a market system determine price and quantity.

First, briefly explain the reason(s) why the true cost of any decision is its opportunity cost;

Next, list the three decisions every household or firm must make in deciding how to allocate its scarce resources and briefly explain the exchange in which of the possible combinations of outputs to producer is carried out as well as the system in which it is decided how much of the total output of each output to distribute to each person;

Then, briefly explain an optimal decision you recently made. In doing so, be certain your answer includes an explanation of the reason(s) it best served your objectives and how you allocated resources in your decision- making process; and,

Lastly, critically analyze the following video  (you need not watch more than 10-minutes of the video) focusing on one area of inquiry related to scarcity and choice. In doing so, you should limit your use of information in your analysis to the production possibilities frontier and the principle of efficiency:

Land Rush

https://www.youtube.com/watch?v=O_pKnP-2mOQ

Part Two:  Key Concepts (25 Points)                                                                                  /                   

Key principles develop key concepts. Briefly, discuss the following key concepts and their role in microeconomics. You must  answer  Question  1.  Then, from  the  remaining  questions,  select  two  additional  questions  to  answer.  Your discussion for each question should be no less than 250 words for each answer. Your discussion must include content from the related chapters, the lecture notes, and digital media archive.

1.)            Supply and Demand

A demand curve is a graphical representation of how much of a good or service households will want to buy at different prices. A supply curve is a graphical representation of how much of a good or service a firm is  willing  to  sell  at  some  specific  price.  The  intersection  of  the  demand  and  supply  curve  is  called equilibrium.

First, briefly explain the laws of supply and demand. In doing so, be certain your answer includes an explanation of the following:

i.)    the objectives of the consumer and the producer in a competitive market; and,

ii.)   an explanation of the relationship between price and quantity for goods that are substitutes and for goods that are compliments.

Then, briefly explain the relationship between price and quantity above the equilibrium price, and the relationship between price and quantity below the equilibrium price. In doing so, be certain your answer includes an explanation of the two separate conditions that result from each relationship to their related market inefficiencies;

Lastly, critically analyze the following article focusing on one area of inquiry related to supply and demand. In doing so, you should limit your use of information in your analysis to content only from Chapter 4 Supply and Demand – An Initial Look:

Would You Pay $1,750 For This T-Shirt? The Stunning Story Of This Veblen Brand

https://www.forbes.com/sites/johngreathouse/2018/02/10/would-you-pay-1750-for-a-t-shirt-the-stunning-story-of-this-veblen-brand/?sh=6443e51d1aa3   

2.)            Building Blocks for Supply and Demand Analysis

Simultaneous  shifts  of  the  demand  and  supply  curves  can  result  in  very  different  price  and  quantity relationships.

First, explain the price and quantity relationship where there is a small rightward shift of the supply curve and a larger rightward shift of the demand curve.

Next, briefly, explain one factor that may have caused the shift of the supply curve and one factor that may have caused the shift of the demand curve.

Then, explain the price and quantity relationship where there is a large rightward shift of the supply curve and a smaller leftward shift of the demand curve.

Lastly, briefly, explain a factor different from the one above that may have caused the shift of the supply curve and a factor different from the one above that may have caused the shift of the demand curve.

3.)            Price Controls

A surplus occurs when the market price is above the equilibrium price. It results when the quantity supplied exceeds the quantity demanded. A shortage occurs when the market price is below the equilibrium price. It results when the quantity demanded exceeds the quantity supplied. Both can result from price controls, which occurs when a legal restriction creates a market price that is below or above the equilibrium price.

First, explain the two types of price controls that result in market inefficiency. In doing so, be certain your answer includes an explanation of the following:

i.) the impact these types of price controls may have on the consumer; and, ii.)the type of market that may result from price controls.

4.)            Government Imposed Tax

Microeconomic economic activity is used to explain the role households and firms engage in. At times, an attempt by the government to regulate the market can impact this engagement in the market.

First, briefly explain who pays for a new government-imposed tax on goods;

Next, briefly explain the way(s) the market mechanism allows the producer to shift a part of a tax onto the consumer;

Then, briefly explain the impacts of a black market if the tax on the new good results in consumers seeking an alternative good in such a market; and

Lastly, briefly explain the impact the imposition of a new tax on a good could have on the well-being of consumers.  In  doing  so,  be  certain  to  provide  in  your  answer  one  example  of  a  contemporary microeconomic issue that illustrates this condition.

5.)            Consumer Choice

Economists measure the consumer benefit of a good by the amount of some other good the consumer is willing to give-up to consume it. The principle of utility is a theory of consumer choice that states each consumer spends income in the way that yields the greatest amount of satisfaction (utility).

First, explain the two types of utility? In doing so, be certain that your answer includes a discussion about how each type of utility differs from the another.

Next, identify the economic law and explain its rationale in observing the reason why the more of a good a consumer has, the less marginal utility an additional unit contributes to overall satisfaction.

Lastly, give one example of this law from your own life experience.

6.)            Elasticity

Price elasticity of demand is the responsiveness of quantity demanded to price changes. The price elasticity of demand has two functions: it measures the responsiveness of demand to a change in price; and, it informs the firm whether an increase in price will increase or decrease its total revenue. Governments and courts use elasticity to measure the responsiveness of demand to price changes. Firms use elasticity to decide the price of their products or whether to add new product models.

First, briefly explain the three basic attributes of the elasticity formula. In doing so, be certain your answers include a discussion of the following:

i.) perfectly elastic demand curve;

ii) perfectly inelastic demand curve; and, iii.)unit elastic demand curve.

Next, briefly explain effect of price elasticity of demand on total expenditure and its effect on total revenue; Then, briefly list the determinants of demand elasticity; and

Lastly, identify and briefly explain how price elasticity of demand was used to measure a recent economic activity. In doing so, be certain to provide in your answer one example of a contemporary microeconomic issue that illustrates this condition.

Part Three:  Formulas and Graphs (25 Points)                                                            _______/_______

Key principles and key concepts describe formulas and graphs. Briefly, discuss the following formulas or schedules and their  role  in  microeconomics.  You  must  answer  Question  1.  Then, from  the  remaining  questions,  select  two additional questions to answer. Be certain to include in your discussion how each is used as an analytic tool used by economists. Your discussion for each question should be no  less  than 150 words. Your discussion must include content from the related chapters, the lecture notes, and digital media archive.

1.) Demand, Supply and Price Control

First,  looking  at  the  data  in  each  of  the  following  schedules,  label  the  corresponding  schedule  either “Demand Schedule” or “Supply Schedule;”

Schedule 1.1:                     .

Schedule 1.2:                     .

Next, graphically illustrate the supply curve and demand curve for eggs, being certain that you fully label the graph. In doing so, be certain to include in your labeling, the equilibrium price and quantity of eggs.

Then, highlight the areas at which there is a shortage and at which there is a surplus.

Next, graphically illustrate simultaneous shifts of the demand and supply curves for eggs, where there is a small rightward shift of the supply curve and a larger leftward shift of the demand curve, being certain that you fully label the graph.

Then, briefly explain what happens to the equilibrium price and equilibrium quantity of eggs as a result of the shifts and what could have caused the supply curve to shift rightward and what could have caused the demand curve to shift leftward; and,

Next, distinguish the difference between a movement along a curve and a shift of the curve. In doing so, be certain to list in your answer the factors shifting the demand curve as well as the factors shifting the supply curve;

Lastly, briefly, explain the purpose of the graphical illustration in terms of the Law of Supply and Demand.

2.)            Price Controls

a.)           Price Ceiling

Graphically illustrate a price ceiling, being certain that you fully label the graph.

Then, briefly, explain what happens to the price and quantity when there is a price ceiling. In doing so, explain the impact of this price control on the market.

b.)           Price Floor

Graphically illustrate a price floor, being certain that you fully label the graph.

Then, briefly, explain what happens to the price and quantity when there is a price floor. In doing so, explain the impact of this price control on the market.

3.)           Total Utility, Marginal Utility, and Marginal Net Utility

Using the following schedule, calculate the marginal utility and marginal net utility from a consumer’s purchase of this good.

Then, graphically illustrate the marginal utility and marginal net utility, being certain that you fully label the graphs.

Lastly, briefly, explain the graphs in terms of the Law of Diminishing Marginal Utility.

4.)            Elasticity

a.)            Price Elasticity of Demand

Using the following schedule, calculate the price elasticity of demand for this good, being certain that you show your math. Then, using the following schedule, illustrate the elasticity of the demand curve.

b.)             Cross Elasticity of Demand

From the following description, calculate the cross elasticity of these two goods, being certain that you show your math. Then, briefly, explain whether these two goods are compliments or substitutes.

The percentage change in Quantity of X is -30%. The percentage change in Price of Y is 120%.

Part Four: Analytic Analysis (25 Points)                                                          __________/__________  

Key  principles,  key  concepts,  and formulas/graphs  guide  a  researcher’s  analytic  analysis.  Following  the  specific instructions below, conduct an analytic analysis under the stated conditions of inquiry in no less than 500 words. Your discussion must include content from the related chapters, the lecture notes, and digital media archive.

We have discussed and debated four topics in microeconomics: Scarcity and Choice; Supply, Demand, and Equilibrium; Consumer Choice; and, Elasticity. In doing so, we explored how each is inter-related and greatly  impact  contemporary  issues  in  the  microeconomy.   Our  discussions  and  debates  included  the efficiency and equity of microeconomic decision-making as well as the impact such decisions have on the human  condition  beyond  microeconomics.  In  this  context,  differences  in  standards  of  living  were  not sufficiently explained by human capital, physical capital, and technology. Many people find something pernicious about the economic and social conditions under which they live. With this in mind, critically analyze the following video focusing on two areas of inquiry – one must be related to Elasticity, the other area  of  inquiry  may  be  selected  from  Scarcity  and  Choice;  Supply,  Demand  and  Equilibrium;  or, Consumer Choice.

GQ. 2015. “Bling Dynasty: Welcome to the Good Life.”

http://video.gq.com/watch/the-bling-dynasty-china-s-wealthiest-1-percent-welcome-to-the-good-life