MICROECONOMICS (ECON I) FALL 2016 MID-TERM EXAM

MICROECONOMICS (ECON I) FALL 2016 MID-TERM EXAMPlease use a word processor such as Microsoft Word, Apple Pages or OpenOffice for your answers. If you have trouble editing the graphs, you can also sketch them on paper, take pictures of them and then insert the pictures in your file. Please make sure that the graphs are readable. Also please also print your file to pdf and attach both files (e.g. the Word file and the pdf file, which is just a print of the Word file). PDF is more stable and readable independently from the source file. Make sure that your graphs are clearly readable as points will be deducted for hard to read graphs.Total points = 301) (4 points) Assume the following table shows the yields per acre of wine grapes and olive oil in two different countries, country A and country Z. (Also assume that in each country the labor and other processing costs per acre are the same regardless of whether grape vines or olive trees are cultivated).Country A Country ZOlive Oil yield 40 barrels 30 barrelsGrape yield 90 barrels 45 barrelsSuppose initially each country had erected high tariff barriers to keep out foreign wine and/or olive oil and was producing for its own needs only.a) Which country has the lower opportunity cost of producing olive oil?b) According to the principle of comparative advantage, which country would export olive oil after the elimination of trade barriers?2) (6 points)a) Draw a supply-demand diagram representing Lowell’s market for food services (restaurant meals, fast food meals etc.). Remember to label the axes.b) Wang Laboratories was a famous computer company based in Lowell. It declared bankruptcy in 1992 and had to lay off 5,000 of its 13,000 employees at the time. Show on your graph what likely happened to the market for food services in Lowell after Wang’s bankruptcy.c) Explain how the Lowell market for food services adjusted from the old equilibrium to the new one after Wang’s bankruptcy. For example, after Wang’s bankruptcy, at the old equilibrium price, was there excess demand or excess supply? How was the new equilibrium price achieved?3) (2 points) Joe likes to maximize his utility. He is currently weighing two options for his meal, pizza or pasta. A pizza costs $9 while a dish of pasta costs $12. Is it correct to say that, if Joe opts for pasta, then Joe’s marginal utility from pasta is larger than Joe’s marginal utility from pizza?4) (4 points) The chart on the following page shows the average daily demand for tokens on a major urban rapid transit system.a)What is the elasticity of demand at a fare of $2.50/token? (Show your calculations)b) Is the revenue maximizing fare higher than, lower than or equal to $2.50/token Explain your reasoning using the concept of elasticity. 5) (6 points)a) Between 2009 and 2014, employment in Greater Boston has increased by more than 200,000 units. At the same time, the number of housing units has remained almost unchanged during this period. Draw a supply and demand diagram to explain what happened in the Greater Boston’s housing market during this period. On your diagram show the equilibrium point in 2009 and the equilibrium point in 2014. Label the axes and all the relevant curves.b) In the same period, the median price of a single-family home in the region increased by 12 percent (faster than inflation). Can your diagram above explain why prices had to increase markedly during this period? Was the supply of housing inelastic or elastic?c) Current zoning regulations in Greater Boston usually restrict new development to small size buildings (single-family homes rather than, say, apartment complexes). Suppose that the zoning regulations in Greater Boston were relaxed allowing for larger developments. Use a supply and demand graph to show what would likely happen to the equilibrium price in the housing market.6)(8 points) Pictured above are the Marginal Cost, Average Variable Cost and Average Total Cost schedules of a contract sewing factory which produces women’s blouses for major clothing retailers. Prices are contract prices per dozen blouses. Quantities are thousands of dozens per month. Arrows show some Price – Quantity combinations on the cost curves.a) What is the minimum efficient scale of production for this firm? Explain in a sentence or two.b) At what level of output does the firm start to experience diminishing marginal productivity of its variable inputs. (Explain in a sentence or two).c) If the current market price is $95/dozen, how much will this firm produce per month? (Explain using the concept of marginal revenue).d) Is a market price of $95/dozen the long-run equilibrium price in this market? Explain your answer in detail and if there is a different equilibrium price identify that price.