These are solutions to Fall 2013 s Econ 1101 Midterm 1 No guarantees are made that this guide is error free so please consult your TA or instructor if anything looks wrong 1 If the price of sweeteners a complementary good to coffee decreases This causes a shift in the demand curve since the price of a related good changes Demand will shift up and to the right while the supply curve is unchanged This results in an increase in the equilibrium price and quantity of coffee The answer is A 2 Incomes decrease Income is a determinate of demand so this causes the demand curve to shift We are told to assume that coffee is an inferior good so this means that a decrease in income will cause the demand curve to shift up and to the right the supply curve is again unchanged This results in an increase in the equilibrium price and quantity of coffee The answer is A 3 Two things happen i technology improves the efficiency of harvesting coffee and ii temperature falls and more people buy coffee The first event technological improvement causes the supply curve to shift Improved technology means that it is cheaper to produce coffee which will result in the supply curve shifting out to the right The second event temperature falls and more people buy coffee is a seasonal change in consumer tastes that causes the demand curve to shift up and to the left Both the first and second events result in the equilibrium quantity of coffee increasing However the supply shift will put downward pressure on price and the demand shift will result in upward pressure on price Therefore the net effect on price is ambiguous The answer is C 4 Income increases by 31 and the quantity demanded of spam increases by 32 This tells us nothing about the price elasticity of spam so we can rule out answers a c For a normal good if income increases quantity demanded increases which is what we are observing here with spam Therefore spam is a normal good The answer is D 5 Since quantity demanded of widgets stayed the same one of the curves will be perfectly inelastic It cannot be the demand curve that is perfectly inelastic however since income increases and will cause the demand curve to shift to the right This means that the supply is perfectly inelastic The demand therefore just needs to be something that is not perfectly inelastic and so the demand being unit elastic is a possible case The answer is A 6 Consumer surplus is the red area in the following graph It is 0 5 5 5 12 5 The answer is C 7 Producer surplus is the red area in the following graph It is 0 5 3 5 7 5 The answer is A 8 For an 8 tax we can draw a tax wedge like in the graph above Here quantity will be zero No one produces and no one consumes Therefore consumer surplus is zero The answer is A 9 Since no one produces nothing can be taxed on Government receives zero tax revenue The answer is A 10 An 8 tax gives zero CS and zero PS so TS 0 Compare to the free market allocation the DWL is the entire triangle on the left Area of this triangle is 1 2 9 1 5 20 Or you could add up your answers in Question 6 and 7 to get the TS in free market The answer is D 11 When there is a price floor that is above the equilibrium price such as in this case we see that we will have a binding price floor A binding price floor will cause the quantity supplied to be higher than the quantity demanded in this market In other words there are more suppliers 10 of them that want to sell than there are buyers 2 of them who want to buy We know that the quantity in the market will be 2 since at a price of 7 only 2 people would want to buy Those two people will be the two that values a widget at the highest and they will be D1 and D2 Because of this we know that the consumer surplus will be based on the consumer surplus of these two consumers The area of their consumer surplus is the red triangle in the diagram above The area of this triangle is 2 base is 2 height is 2 so x base x height 2 The answer is B 12 As mentioned above there are 10 producers who want to sell but only 2 consumers who want to buy Because of this only 2 out of the 10 producers will get to sell the widget Because no rule for rationing is given we don t know which two of the ten suppliers will be selling widgets in this market Because of that we do not have enough information to know what producer surplus is The answer is E 13 From the 8 tax we saw that the quantity was brought to zero and so deadweight loss was equal to the entire area of the free market total surplus since the market with a tax has a total surplus of 0 We see that while the price floor is inefficient it is not so inefficient such that the total surplus will be zero At the very least we will have some area for consumer surplus and some minimal area for producer surplus Therefore this price floor is more efficient since it has higher total surplus than a tax of 8 The answer is A 14 The First Welfare Theorem states that under competitive markets without externalities market allocation is Pareto efficient that is market allocation maximizes the total surplus the social pie Remember that the Pareto efficient concept is not related with equity of an allocation The answer is E 15 A good is defined luxury good if it is income elastic that is if the percentage increase in the quantity demanded is higher than the percentage increase in income This implies that the share of income you spend on cheesecake increases The answer is E 16 To calculate the price elasticity of demand we need a change in the price of the corn while all the other forces affecting supply and or demand remains constant So it is necessary to have a change in the price of corn The answer is C 17 A price ceiling is a maximum price allowed for sale in a market Remember that a price ceiling is only binding that is it actually affects the equilibrium of the market when the free market equilibrium price is higher than the price ceiling In the market for flowers the equilibrium price is 12 The price ceiling of 6 would be binding here because the ceiling prevents the market from reaching the price it wants of 12 At the equilibrium price of 12 it would have been that supply demand At any lower price than 12 it should be that quantity demanded is greater than quantity supplied So …