ECON1210 Intorductory Microeconomics

Final Examination

This version of the exam paper is for the following student only:

> > Ka-fu WONG (UID=1234567890) < <

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SCORING: One point for correct answer(s) in each question.

● For multiple choice questions, points will be deducted for wrong answers depending on the number of choices given in the question. When there are n choices, 1/(n - 1) point will be deducted for wrong answer, such that picking an answer randomly will yield zero expected points. For example, when there are 5 choices, 1/4 (i.e., 0.25) point will be deducted for wrong answer.

● For short-answer questions, one point is awarded if all answers within the question are correct, zero otherwise.

NO CHEATING PLEASE!!  This is an open book test.  You can refer to any materials relevant to the test, and use any calculators and computers. But, you should not be working in a group or consulting any human during the test. To prevent cheating, each student is given a unique version of the test.

1.  My university ID number is [ Answer01 = 1234567890 ].

Please refer to the background information below to answer question 2 to 8.

The student union of a local university has complained to the Utopia’s Ministry of Bubble Tea that the price of bubble tea (dollars per cup) is too high and requested the Ministry to do something about it. The Minister promises to consider two specific policies proposed by the students:  (1) price ceiling on bubble tea, and (2) a price ceiling on boba. The market supply and demand curves of bubble tea are given by the following equations.

2. From the information, we can conclude that the unregulated market equilibrium price is [ Answer02A = 4.71 ] dollars per cup and equilibrium quantity is [ Answer02B = 15.29 ] million cups per year.

3. At the unregulated market equilibrium, the consumer surplus is [ Answer03A = 116.87 ] million dollars per year and the producer surplus is [ Answer03B = 27.83 ] million dollars per year.

4.  The Minister considers a price ceiling on bubble tea proposed by the students: 3.23 dollars per cup. At this proposed price ceiling, there will be a shortage of [ Answer04 = 7.70 ] million cups of tea

per year.

5.  At this proposed price ceiling on bubble tea, consumer surplus is expected to be [ Answer05A =

110.94 ] million dollars per year, and producer surplus to be [ Answer05B = 9.78 ] million dollars per year.

(Assume that all transacted quantity are somehow allocated to consumers with the highest willingness to pay. No bribery and no need to wait in line.)

6.  Students also wanted the Minister to consider a price ceiling on boba: 3.58 dollar(s) per unit of boba. Boba is a major input for making bubble tea. Bubble tea is produced using one unit of tea for each unit of boba. The hope is that such policy helps lower the production cost of making bubble tea and yet would not result in any shortage in the final product market (i.e., bubble tea).

The supply curve of boba is given by the equation

Qb = 3.42Pb     million units of boba

After the policy is in place, we expect shops sell bubble tea for [ Answer06A = 7.76 ] dollars per cup, and the market quantity will be [ Answer06B = 12.24 ] million cups of bubble tea per year.

7.  Given the price ceiling on boba, we expect that the consumer surplus of bubble tea consumption will be [ Answer07 = 74.95 ] million dollars per year.

8.  Thus, if the objective is to maximize consumer surplus in the consumption of bubble tea, the Ministry should

A)  not impose any of the regulatory measures proposed by the students.

B)  impose a price ceiling of 3.23 dollar(s) per cups of bubble tea.

C)  impose a price ceiling of 3.58 dollar(s) per unit of boba.

[ Answer08 = A ]

9.  John is thinking about watching a football game with his friend.  John is willing to pay $189 for watching the game. A ticket of the game costs $74 and he will have to cancel his part-time job that pays $295. Normally, he would be unwilling to do the part-time job for less than $Y.  (John views the unpleasantness of the part-time job as an offset against its salary.)  John will decide to watch the game if Y is at least [ Answer09 = 180.00 ].

Please refer to the background information below to answer question 10 to 12.

John and Mary are the only people in Islandia, a small island nation.  They both produce shelter and

clothing.  Let C denote the quantity of clothing, and S denote the quantity of shelter.  The following equations summarize their production possibility curves (PPCs).

10.  Suppose Islandia is a closed economy. If John and Mary would like to jointly consume 20 units of shelter, they would be able to jointly consume a maximum of [ Answer10 = 7.00 ] of clothing.

11. In this closed economy, any admissible term of trade between John and Mary has to be larger than [ Answer11A = 2.00 ] units of clothing per unit of shelter and smaller than [ Answer11B = 7 ] units of clothing per unit of shelter.

12.  Suppose Islandia is now opened up to trade with the rest of the world, and can trade at a world term

of trade of 9.5 units of clothing per unit of shelter. If John and Mary would like to jointly consume 20 units of shelter, they would be able to jointly consume a maximum of [ Answer12 = 9.50 ] of clothing.

13. Eric, Flora, Glen and Howard can produce bells and whistles. The table below shows their productivity (units per hour).

If this small economy wants to allocate two persons to completely specialize in the production of bells, who should be allocated to the production of bells?

A)  Eric and Flora

B)  Eric and Glen

C)  Eric and Howard

D)  Flora and Glen

E)  Flora and Howard

F)  Glen and Howard

[ Answer13 = B ]

14. France and Italy trade tanks and jets. France can produce one jet with 25000 man hours, and one tank with 14000 man hours.  Italy can produce one jet with 30000 man hours, and one tank with

5000 man hours. You are on the Italian team bargaining over the terms of trade. You tell the defense minister that the best terms of trade you can reasonably ask for are [ Answer14A = 1.79 ] tanks per jet and the worst you can accept are [ Answer14B = 6.00 ] tanks per jet.

Please refer to the background information below to answer question 15 to 16.

Consider the following individual production possibilities curves of Stephen and Paul (not drawn to scale),

where a = 100, b = 550, c = 550, d = 100.

Stephen and Paul both work at Trustworthy Garage.  Cars being served in the garage all require one standard maintenance service, i.e., one clutch replacement and one brake replacement.

15. If Stephen and Paul work separately, they can perform in total [ Answer15 = 169.23 ] standard maintenance services (can be non-integer).

16. If Stephen and Paul work together, they can perform in total [ Answer16 = 225.00 ] PERCENT MORE standard maintenance services than working separately.

17. Lochheed is the monopoly supplier of lake-monster sightings in the Scottish Highlands.  It faces a demand curve given by the equation

Q = 23950 - 28P   lake visits

From this information, we can identify that the marginal revenue curve is in the form of

MR = A - BQ

where A is equal to [ Answer17A = 855.36 ], and B is equal to [ Answer17B = 0.07 ]

Please refer to the background information below to answer question 18 to 24.

Utopia doctors immunize children against measles, a highly contagious and potentially deadly virus. The

demand and supply curves for the immunization are given by the following equations.

but the social marginal benefit (SMB ) is given by the following equation

Q = 200 - 0.9 × SMB    thousand immunizations per year

and the private marginal cost and social marginal cost are identical.

18. If the market is left unregulated, the market equilibrium level of immunization is [ Answer18 = 86.00 ] thousand immunizations per year.

19.  The total economic surplus to the society from the market equilibrium level of immunization is [ Answer19 = 7663.56 ] thousand dollars per year.

20.  The socially efficient level of immunization is [ Answer20 = 93.12 ] thousand immunizations per year.

21.  The total economic surplus to the society at the socially efficient level of immunization is [ Answer21 = 7708.68 ] thousand dollars per year.

22.  Suppose the government decides to address the inefficiently low rate of immunization by paying doctors for every immunization.  That is, the cost of immunization to the general public is zero. The total economic surplus to the society with such publicly-paid immunization is [ Answer22 = -2444.44 ] thousand dollars per year.

23. If, instead, the government applies a per unit subsidy on immunization to achieve the socially efficient level, it should implement a per unit subsidy of [ Answer23 = 11.88 ] dollar(s) per immmunization.

24.  This per unit subsidy will cost the government a total of [ Answer24 = 1105.86 ] thousand dollars of subsidy expenditure per year.

Please refer to the background information below to answer question 25 to 28.

There are 15 doctors living at the mid-level of a hill. The hospital is located at the foot of the hill. Every morning, each doctor can either drive or use free tram service down the hill to go to work. As there is only a small road down the hill, traffic congestion may occur if many doctors choose to drive. If n doctors choose to drive, it will take each doctor 2n + 4 minutes to drive down the hill (n can only take integer values). On the other hand, it always takes 12 minutes to get down by tram.  Assume that all doctors have the

same opportunity cost of time ($20 per minute); and, other than driving time, all driving related cost are negligible.

25. If the doctors make their decisions individually, we would expect [ Answer25 = 4.00 ] doctors will drive in equilibrium.

26. From the society’s perspective, we should have [ Answer26 = 2.00 ] doctors driving.

27. If the government charges a $60 toll for the road, and the doctors make their decisions individually, we would expect [ Answer27 = 2.00 ] doctors will drive in equilibrium.

28.  Suppose any policy (such as the toll collection) to regulate the road usage is feasible only with an implementation cost of $C per day. At its best, the government can in fact set a toll to achieve the socially optimal number of doctors driving.  From the society’s perspective, such policy should be implemented only if C is less than [ Answer28 = 160.00 ].

Please refer to the background information below to answer question 29 to 30.

The demand for aluminum (tons per day) by Ali Motor and Baba Motor are given by the following equations

29. We know that the market demand (consisting of Ali and Baba) should look like the graph below.

We can identify the three points as:

x-coordinate                                y-coordinate

Point A:                            0 [ Answer29A = 3333.33 ]

Point B: [ Answer29B = 775.00 ] [ Answer29C = 750.00 ]

Point C: [ Answer29D = 1900.00 ] 0

30.  Given this market demand for aluminum, at the price of 50 dollars per ton, the consumer surplus in this market is [ Answer30 = 1911041.67 ] dollars per day.