EC-252: Principles of Microeconomics

1. (5 points) What is the producer problem?

1. (5 points) What is the consumer problem?

1. (5 points) The drawing below depicts three indifference curves for corn and wheat for a given consumer.  Do those indifference curves violate any of the properties of ICs?  Circle the correct answer below.

YES                                          NO

1. (8 points) Using “trade triangles,” show a mutually beneficial trade between Janice and Vernon below.  The points marked on their ICs represent their initial baskets.
2. (8 points) Look at the drawing of an indifference curve below and answer the True/False questions that follow by circling the correct answer.

TRUE               FALSE              Basket B provides 10 utils for this consumer.

TRUE               FALSE              Basket A always provides 10 utils for a different consumer.

TRUE               FALSE              Baskets A and D have the same amount of corn.

TRUE               FALSE              If this consumer solves his consumer problem and chooses basket C, basket A was unaffordable.

TRUE               FALSE              Basket C could provide 5 utils for this consumer.

TRUE               FALSE              The slope of the IC at baskets A and B is the same.

TRUE               FALSE              If this consumer solves his consumer problem and chooses basket A, the price of corn is much greater than the price of wheat (assume equal scaling on the axes of the graph).

1. (6 points) Show a consumer’s budget constraint for ham and cheese if the price of ham is \$10, price of cheese is \$16, and he has \$320 of income.  Label your endpoints and the slope of the budget line.

1. (9 points) Answer the following True/False questions that refer to the same situation as Problem #6 by circling the correct answer.

TRUE               FALSE              The consumer could afford to buy 30 units of cheese (and no ham).

TRUE               FALSE              The consumer could afford to buy 30 units of ham (and no cheese).

TRUE               FALSE              The consumer could afford to buy 10 units of ham and 10 units of cheese.

TRUE               FALSE              The consumer could afford to buy 15 units of ham and 15 units of cheese.

TRUE               FALSE              The consumer could afford to buy 20 units of ham and 20 units of cheese.

TRUE               FALSE              The consumer could afford to buy 15 units of ham and 5 units of cheese.

TRUE               FALSE              If the consumer bought 10 units of ham and 15 units of cheese, he would be correctly solving his consumer problem.

TRUE               FALSE              If the price of ham increased, the maximum amount of cheese the consumer could afford would be unchanged.

TRUE               FALSE              If the price of ham increased and the consumer continued to buy at least 1 unit of ham, the amount of cheese the consumer could afford would be unchanged.

1. (5 points) On the consumer side, why are prices advantageous over a system of distributed baskets where people can trade amongst themselves?  After all, as shown in problem #4, people in the priceless trading system can end up with baskets that make them happier than what they received.  So what advantage do prices confer for consumers?  (Hint: Pareto efficient should be included in this answer.)

1. (5 points) On the producer side, why are prices advantageous over a system where each producer would make some amount of goods along their PPF?  (Hint: The word incentives should be included in this answer.  Explain what information the producers would have to glean from others before making their production decision in a priceless system of trade.)

1. (8 points) Show the derivation of a supply curve from the underlying fundamentals of producers solving their problem.  In other words, show a societal PPF, given price line, and amount of good 1 produced.  Then change the price of good 1 (either decrease or increase it) and show the new amount of good 1 produced.  Change the price one more time (in the same direction) and show the new amount of good 1 produced.  Plot your three (Q1, P1) points on a separate graph to reveal your supply curve.

1. (10 points) Our society is made up of two individuals named Mary and Jake.  The goods they produce and consume are chicken and eggs.  Currently, prices are such that Mary solves her producer problem by making all chicken and Jake solves his producer problem by making all eggs.

1. Depict the situation as described above by adding PPFs and revenue lines to the graphs for Mary and Jake below. Be sure to label which is the PPF and which is the revenue line on both graphs.  Assume the graphs are scaled the same.
2. When Mary and Jake then solve their consumer problems at these prices, overall they want to consume more chicken (and fewer eggs) than they were willing to produce. Add indifference curves to both graphs above to depict this situation.

1. Given the situation in part b., what will happen to the price of chicken (PC) and the price of eggs (PE)?

1. (10 points) If Kelvin and Clyde can produce goods according to the table below, what is the only price ratio (P1/P2) that could result in 15 units of good 1 being made?  Show your work and/or explanation below.

Table 1 Kelvin and Clyde’s Production

 Kelvin Clyde Good 1 10 7 Good 2 20 42

Please circle the correct answer for the multiple choice questions that follow.

1. (4 points) For a given good at a given price, if the amount of that good that producers supply is more than the amount that consumers demand, what will happen to the price of that good?
1. It will increase
2. It will decrease
3. It will not change

1. (4 points) When the indifference curve is tangent to the budget constraint:
1. Indifference curves are likely to intersect
2. Income is at its optimum for the consumer
3. A consumer cannot be made better off without increasing his income
4. The consumer is likely at a suboptimal level of consumption

1. (4 points) A decrease in income will cause a consumer’s budget constraint to:
1. Bow out from the origin
2. Shift outward, parallel to its initial position
3. Shift inward, parallel to its initial position
4. Pivot around the horizontal axis
5. Pivot around the vertical axis
6. Increase its slope while maintaining the same y-axis endpoint
7. Increase its slope while maintaining the same x-axis endpoint
8. Both a. and e.
9. Both d. and g.

1. (4 points) The following diagram shows a budget constraint for a particular consumer.  If the price of X is \$12, what is the price of Y?

1. \$28
2. \$33
3. \$39
4. \$40
5. \$42
6. \$47
7. \$51
8. \$54

EC Homework