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Microeconomics Questions and Graph Analysis

Part One

1) Jonathan is currently working for a clothing company and earning \$20,000 per year.  In hopes of raising his future income he is considering quitting his job and returning to school to get his degree.  He estimates that tuition and textbooks would cost \$4,000/year while all other living expenses would be \$8,000/year.  Jonathan thus calculates his costs for the first year of college to be \$12,000.  Was he correct?  If not, what is the total cost for this first year?

2) According to a survey of consumer opinion, people strongly desire safer cars and say they are willing to pay substantially more for safer cars. Using this information, one auto firm adds numerous safety features to its cars, raising the price by several thousand dollars.  Sales drop sharply and the firm loses money. What likely went wrong?

3) "The United States can't gain from trading with Canada, because their economy is so big that they can produce all goods more efficiently than Canada."  Is this a valid claim?  Explain from either Counties perspective.

4) Explain why, if specialization and trade always makes it possible to increase a country's consumption, in effect generating extra output from the existing stock of scarce resources, anyone would favour placing restrictions on trade through such means as tariffs or quotas.

5) Explain why trade between two countries can be profitable for both even if one is better than the other in producing all goods and services.

Part Two

6) Use a graph to answer each of the following:  How is the equilibrium price in a market determined? What happens if the current price is above the equilibrium price? What happens if the current price is below the equilibrium price?

7) Using a graph, show market equilibrium. Next, show how the graph changes when input costs increase, ceteris paribus. Explain what happens in the market as a result.

8) Not long ago the papers announced that there was a surplus of apples produced in the Okanagan Valley of British Columbia.  Explain how there can be surpluses in a world of scarcity.

9) In 2007, the price of gasoline in Canada was higher than it had been in 2006.  Also in 2007, more gasoline was purchased in Canada than had been in 2006.  According to the law of demand, higher prices cause lower quantities demanded, not higher.  Use graphs to explain three potential reasons what might have happened to bring about a higher price and a higher quantity sold in 2007 than in 2006 if the supply and demand curves had their normal shapes.

Part Three

10) Goods or services with low price elasticity of demand are sometimes said to be "necessities."   Explain, using two examples, why that way of labelling goods can be misleading.

11) Explain to your boss at the Premiere Pizza Palace why, if the elasticity of demand for PPP's pizza is 0.8, then ceteris paribus it would be a bad idea for the company to hold a "20% off" sale.

12) The elasticity of demand for Expo 2000 tickets was found to be 0.61.  Explain what that number tells us about the effects of Expo's pricing on profits.  Suggest reasons why the organizers might believe that they made the right pricing decision.

13) In the room where you are answering this question, the ceiling is above the floor.  With that in mind, use Figure 6-1 to demonstrate a price ceiling and a price floor and use it to help explain why when we talk about them in economics, price floors are above equilibrium and price ceilings are below.

14) "Scarcity implies that some way of rationing goods and services must be found." Explain what this statement means.  In what ways can the rationing be done?

15) Use Figure 6-2 to explain the microeconomic effects of a minimum wage set above the equilibrium wage rate. Who would likely be most affected?