Question List

Microeconomics Exam 1

(Week 5)

One of these questions will be selected at random at the time of the exam. It will count for 20% of your exam grade and be graded for subject mastery. Suggestions: When you write, please write legibly. If your instructor must struggle to read your words, how can he know how clever you are? Warning: Questions may be slightly different on exam day, for example different numbers if calculations are required, or even a slightly different calculation. If calculations are required, I do not base your grade on getting the correct answer, but on showing your scratch work so I can see how you got your answer.

1) Models. We use models in all our activities of life, including science, business, social relationships. Write an essay on the subject of models, using examples from inside and outside economics as your examples. Focus on ideas important to your instructor. (Warning: your instructor does not like the discussion in the text very much!) In addition to these general instructions, be sure to cover at least the following:

A) Definition of "model" (according to your instructor, not the text).

B) Why do we use models?

C) What are the characteristics of a good model?

D) Give two examples of models you use in everyday life, and four models already presented which we use in the study of economics.

2) "The Basic Model" was presented in early lectures to account for the basic features of economic life in any modern free enterprise economy. Write an essay about "The Basic Model" covering whatever you believe is important to your instructor and being sure to cover at least the following. However, you must write a maximum of 3 pages.

A) What are the assumptions of the basic model and the significance of each one?

B) Why do all societies seem to operate according to the assumptions of "The Basic Model"?

C) How are Capitalism, Socialism and Traditional Societies, as discussed in the text, all examples of economic systems operating under "The Basic Model"?

4) Cost, Opportunity Cost, Marginal Cost, Price, Value and Marginal Opportunity Cost. Write an essay in which you discuss these topics, focusing particularly on relationships, similarities and differences between them. Your basic goal is to write what is important to your instructor about these subjects.

5) Linkages. The process of dealing with scarcity and opportunity cost results in "linkages" between various goods, activities and markets. By linkages we simply mean that what happens in one area affects another. To be a really good economist you must know how to search for, uncover and analyze linkages. Write an essay covering what your instructor might believe is important about the subject of linkages. (Examples of linkages may help you to get started: Markets of substitutes are linked together, as are markets of complements. Scarcity and opportunity cost generate linkages. Inputs of firms are related to outputs. Can you think of others?)

X) Markets, "The Law of One Price", Equilibrium and Prices. In this topic are several possible questions:

6) Essay. Write an essay on Markets. Focus on what you believe is important to your instructor about this subject. In addition to these general instructions, you should be sure to cover the following:

A) Definition of "Market", being sure to use the definition from lecture, NOT from the text!

B) Why do price, and also quantity pouring through a market, come to some equilibrium level? (What is the "mechanism" as observed in the real world?)

C) What conditions must exist in a market for neither buyer nor seller to control the price? Why or how does this work? Give examples of what might happen if this condition does not hold.

7) Essay. Write an essay on "The Law of One Price". Your goal is to write what important to your instructor about this subject. In addition to these general instructions, you should be sure to cover the following:

A) Under what conditions does it hold?

B) Under what conditions might the law NOT hold, and give several examples.

C) What is the "mechanism" by which the law holds? Give examples of what happens if several prices exist in a market.

8) Supply and Demand model. Write an essay on the subject of Supply and Demand. Your goal is to write what important to your instructor about this subject. In addition to these general instructions, you should be sure to cover at least the following:

A) Why do we treat supply and demand separately?

B) What are the variables which affect supply?

C) What are the variables which affect demand?

D) For each variable, what "signs" do you expect for its relationship to the "affected variable" (supply or demand), +, -, 0 or some combination? (You may want to give examples.)

E) What is the special importance of the "own price" of the product in the supply and demand model?

9) Solve a simple supply and demand problem such as the following: Model the airline industry as a single market, with tickets selling at a single price. Draw a supply and demand curve diagram to represent the situation in that industry before the attack and destruction of the World Trade Center. Then show modifications of the diagram to illustrate your analysis of the attack's impact on equilibrium price and quantity (price of tickets and supply and demand for travel) in the airline industry. Use a properly labeled and presented supply and demand curve diagram in your answer, and also the kind of explanatory language an economist would use.

10) Write an essay on the analysis of taxes as they affect markets, illustrated with diagrams. Write a maximum of 3 pages, plus diagrams. Focus on what is important to your instructor. In addition to these general instructions, be sure to cover at least the following:

---what factors determine how the "burden" of a tax is shared between buyers and sellers.

---how can you use supply curve/demand curve diagrams to illustrate the burden of a tax.

---what factors determine the amount of government revenue from a tax and where is tax revenue in the diagram? If a tax is increased, will revenue always increase.

---by what reasoning can you determine the "welfare costs" (i.e. the efficiency costs) of a tax and where is the welfare cost in the diagram.

11) Write an essay on elasticity. Focus on what is interesting or important to your instructor. This is too big a subject for one essay, so write a maximum of 3 pages, plus diagrams. Be sure to cover at least the following:

---define elasticity.

---what are income elasticity, cross price elasticity, own price elasticity, including important ideas about each.

---if the price rises and therefore the quantity demanded of course drops in a market, exactly how if you know the own price elasticity of demand, what can you say about the impact of a rise in price versus total revenue.

---what happens to the own price elasticity of demand as you slide down a straight line demand curves?

---what "variables" determine the elasticity of own price elasticities?

---for extra credit, speculate what the shape would be of a "constant elasticity" demand curves.

12) Do the following problems.

A) If the income elasticity of demand is -.5 and income falls by 20%, answer these two questions: 1) Is this a luxury good, a normal good and/or an inferior good? 2) What will be the percent increase in demand?

B) If when the price of blue cheese rises from $1 to $1.20 per pound the demand for doogees falls from 10,000 doogees per week to 9,000 doogees per week, answer these two questions: 1) Are blue cheese and doogees complements or substitutes? 2) Calculate the cross price elasticity of demand for doogees.