Microeconomics Final Exam

Always show your work and/or explain your answers!

1. (6 points) What is economics and why is the concept of scarcity so central to the field?

2.(20 points) Suppose the people of Latium always have either corn flakes or bran flakes for breakfast. They like both cereals about the same and generally choose whichever is cheaper.In either case, they always put milk in their cereal. Land used to produce corn (used to make corn flakes) can also be used to produce wheat (used to make bran flakes).

1. What is likely to happen to the price and quantity of corn flakes when the price of bran flakes decreases?
2. What is likely to happen to the price and quantity of corn flakes when the price of milk increases.
3. If the price of fertilizer falls (used in the production of both corn and wheat), what is likely to happen to the price and quantity of corn flakes?
4. Recently Latium has begun trading with Minoa. The Minoans enjoy eating cereal but don't have enough land to produce much corn or wheat. What is likely to happen to the price and quantity of corn flakes in Latium as a result of this new trade?

3.(20 points) Suppose that when the price of corn flakes increases by 10% the quantity demanded of corn flakes decreases by 8%.

1. What is the price elasticity of demand for corn flakes? Is demand elastic or inelastic?
2. If the price of corn flakes increases by 10%, what will happen to the total revenue of corn flake producers?
3. Suppose that when the price of bran flakes increases by 5%, the quantity demanded of corn flakes rises by 7%. What is the cross-price elasticity of corn flakes with respect to bran flakes? What does your answer suggest about the relationship between corn flakes and bran flakes?
4. Suppose that when income rises by 8%, the quantity demanded of corn flakes increases by 6%. What is the income elasticity of demand for corn flakes? What does your answer suggest about how consumers view corn flakes, i.e. what type of good are corn flakes?

4.(20 points) Suppose Linus has $15 to spend and wants to buy some pizza and soda pop.The price of a slice of pizza is