Principles of Microeconomics

ECO1203 Take-Home Exam 1

Spring 2022 A. Laramie

1. (20 points) A production possibility frontier (PPF) depicts the maximum combination of goods that a nation can produce given it resources and technology. An example of a nation's PPF is given below:

Point Guns (X) Butter (Y)

A 0 100

B 1 99

C 2 96

D 3 91

E 4 84

F 5 75

G 6 64

H 7 51

I 8 36

J 9 19

K 10 0

Answer the following questions:

A) What is the relative marginal opportunity costs of producing each additional units of guns?

B) Is the relative marginal opportunity costs of producing each additional gun increasing, constant, or decreasing?

C) Suppose a nation is operating at point K, what is the relative marginal opportunity cost of producing the first 19 units of butter?

D) Suppose a nation is operating at point B, what is the relative marginal opportunity cost of producing 1 additional unit of butter?

E) Is the relative marginal opportunity costs of producing butter increasing, constant, or decreasing?

2. (10 points) Briefly define the four main (essential) economic activities that every society engages in. . . (these activities are outlined in chapter 1 of your textbook), and explain how societies utilizing market-based economies engaging in these activities answer the three fundamental economic questions: a) what to produce; b) how to produce; and c) for whom to produces.

3. (20 points) Your job is to analyze the demand for single family homes. The general functional form demand schedule for single family homes is:

Qd = Qd(Price, Price of Complements, Price of Substitutes, Income, Price Expectations, Income Expectations, Taxes, Subsidies, the Number of Buyers).

"Sign" the general functional demand schedule, and explain your signs.

Suppose an analysis of the housing market shows that the demand schedule can be written in specific functional form; that is:

Qd = 10 - .5P.

Answer the following questions?

A) What is intercept?

B) What is the economic meaning of the intercept?

C) What is the slope?

D) What is the economic meaning of the slope?

E) Suppose the price changes from $2 to $4, what is the change in quantity demanded?

F) How are the NPDs in the general functional form demand schedule reflected in the specific functional form demand schedule.

G) Suppose specific functional form demand schedule changes to Qd = 20 - .5P, provide three examples of changes in the NPDs that could explain that change in demand (that shift in the demand schedule).

4. (20 points) Your job is to analyze the supply of single family homes. The general functional form supply schedule for single family homes is:

Qs = Qs(Price, Price of other goods, Factor Costs (such as wage rates or the price of materials (like lumber)), Technology, Price Expectations, Taxes, Subsidies, the Number of Sellers).

"Sign" the general functional supply schedule, and explain your signs.

Suppose an analysis of the housing market shows that the supply schedule can be written in specific functional form; that is:

Qs = 2 + .5P.

Answer the following questions?

A) What is intercept?

B) What is the economic meaning of the intercept?

C) What is the slope?

D) What is the economic meaning of the slope?

E) Suppose the price changes from $2 to $4, what is the change in quantity supplied?

F) How are the NPDs in the general functional form supply schedule reflected in the specific functional form supply schedule.

G) Suppose the specific functional form supply schedule changes to Qs = 0 + .5P, provide three examples of changes in the NPDs that could explain that change in supply (that shift in the supply schedule).

5. (30 points) You are now a housing market analyst. Your combine your analyses in 3 and 4 and explain: a) the initial equilibrium price and quantity; b) how the change in the demand schedule in question 3 affects the equilibrium price and quantity; c) how the change in the supply schedule in question 4 affects equilibrium price and quantity; and d) explain how the simultaneously change in the demand and supply schedules in questions 3 and 4 affect the equilibrium price and quantity. Be sure to use math and graphs to facilitate your analysis.