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ECON102Boyle–Exam2–PracticeExamSolutions
1. C–Diminishingmarginalutilitybecausethereasonwedon’tuseourcellphones
constantlyduringfreeminuteperiodsisbecausewegetlessandlessvalueout
ofeachadditionalminuteweuse.Eventuallywedon’tgetenoughvalueto
continueusingourcellphoneseventhoughtheyarefreetouse.
2. C–Positive0.75.Youknowthegoodsaresubstitutesbecausethecrossprice
elasticityispositive.
Exy=
%#$%&'()''%*
%#+&'()''%,
=
./%
0/%
= 0.75
3. D–Thepollutionyourcarputsintotheairbecausethisisacostabsorbedby
society.
4. C–Youcantellhebegantoexperiencenegativemarginalutilitybecauseheate
somuchthathistotalutilitystartedtodecreasewhenhegotsick.
5. C–ThemarginalutilityofgoodAdividedbythepriceofgoodAshouldequalthe
marginalutilityofgoodBdividedbythepriceofgoodB.
6. B–AnassumptionofconsumerchoiceisthatonegoodCANbesubstitutedfor
another.
7. D–Thelawofdiminishingmarginalutilitybecauseitpredictsthatyouwillget
lessvaluefromthe2nddaythanyoudidfromthe1stday.
8. A–10
Marginalutilityfrom6thbeet=Totalutilityfrom6beets–Totalutilityfrom5
beets=110–100=10
9. C–15
Forthisproblemyouneedtousetheequationthefollowingequationtosolve
forthemarginalutilityoficecream.
(𝑴𝑼𝒐𝒇𝒈𝒐𝒐𝒅𝑨)
(𝑴𝑼𝒐𝒇𝒈𝒐𝒐𝒅𝑩)
=
(𝑷𝒓𝒊𝒄𝒆𝒐𝒇𝒈𝒐𝒐𝒅𝑨)
𝟏𝟎
$𝟐
=
𝑴𝑼𝒊𝒄𝒆𝒄𝒓𝒆𝒂𝒎
$𝟑
(𝑷𝒓𝒊𝒄𝒆𝒐𝒇𝒈𝒐𝒐𝒅𝑩)
MUicecream=15
10. B–WeshouldbuylessofgoodXandmoreofgoodY
BangforthebuckX=10/$5=2utilsperdollar
BangforthebuckY=8/$2=4utilsperdollar
11. A–WeshouldbuymoreofgoodXandlessofgoodY
BangforthebuckX=4/$10=0.4utilsperdollarspent
BangforthebuckY=5/$25=0.2utilsperdollarspent
12. D–Weshouldkeepourspendingthewayitis.
BangforthebuckX=150/$75=2utilsperdollar
BangforthebuckY=250/$125=2utilsperdollar
13. B–Youshoulddisagreewithyourfriendbecauseraisingpriceswillonlyincrease
revenueswhendemandisinelastic.
14. A–Negativeexternalitiesbecausewhencompaniesareforcedtopayforthe
costofnegativeexternalitiestheyaregeneratingthecompany’ssupplycurve
willshifttotheleftandthecompanywillreduceitslevelofproduction.
15. A–Relativelyelasticbecauseyourfriendissensitivetochangesinpriceduetoa
limitedbudget.
16. B–Upperclassmenhaveinelasticdemandbecausetheyarealreadymostofthe
waythroughtheirdegreesoatthatpointtheyaregoingtodowhatisneededto
completetheprogram.Whenyouhavecustomerswithinelasticdemandand
youincreaseprice,revenuewillincrease.
17. B–Economicprofitswillalwaysbelessthanorequaltoaccountingprofits
becauseeconomicprofitsarecalculatedthesamewayasaccountingprofits.The
onlydifferenceisthatopportunitycostsaresubtractedfromeconomicprofits;
however,opportunitycostsarenotsubtractedfromaccountingprofits.
18. B–Itisinelasticbecausetotalrevenueincreasedwhenpriceincreased.
19. B–Demandisinelasticwhentherearenosubstitutesavailable.
20. A–Demandbecomesmoreelasticastimepasses.
21. B–Tomaximizeprofit.
22. C–Nationaldefensebecauseeveryoneinthecountryisprotectedbynational
defensewhetherornottheypayforit,andeveryonecanenjoynationaldefense
atthesametimewithouttakingenjoymentawayfromothers.
23. D–CableTVisexcludablebecauseyouhavetopayforcableTVservicetouseit.
However,itisnon-rivalbecauseeveryonethatpaysforcableTVcanenjoyitat
thesametime.
24. A–Inelasticbecausewearegenerallynotsensitivetochangesinpricesofgoods
thatmakeupasmallpercentofourincome.
25. A–Demandforcandybarsisinelasticbecausetheyareasmallpercentofyour
budget.
26. C–Inelasticbecausetherearefewsubstitutes.
27. B–Thecostofsomeone’srentormortgageistypicallyalargepercentoftheir
overallincomesopeoplewillbesensitivetochangesinthecostofhousing.
28. D–5
EP=
EP=
$%KL$%M
($%MN$%K)/K
/LM/
(M/N/)/K
÷
÷
+KL+M
(+MN+K)/K
QL0
(0NQ)/K
=–5
|EP|=5
29. A–Consumersarenotgoingtobesensitivetochangesinpricerelatedtoaonce
inalifetimeexperience.Ifthepriceofplaneticketstogettoyourbestfriends
weddingincrease,youarestillgoingtogotothewedding.
30. B–Itwillalwaysbenegative.Thelawofdemandtellsusthatpriceandquantity
moveininversedirections.Whentalkingaboutpriceelasticityofdemandinthis
class,wetypicallyexpressitintermsofabsolutevaluesincepriceelasticityof
demandisalwaysnegative.
31. A–Elastic
32. C–Inelasticbecausethereafewsubstitutes
33. B–Youwillbemoresensitivetopricechangesinitemsthatarealargepercent
ofyourbudget
34. A–Demandforuniqueexperiencesisinelasticforthesamereasondemandfor
onceinalifetimeexperiencesisinelastic.
35. C–Immediaterundemand.Demandbecomesmoreelasticastimepasses.So
demandismoreinelasticinrightwhenapricechangeoccurs,whichisthe
immediaterun.Theimmediaterunisevensoonerthantheshortrun.
36. C–Everyonecanuseanaturaldisasterwarningsystematthesametime,andit
ishardtoexcludepeoplefromusingitiftheydon’tpayforit
37. A–Manyclosesubstitutesexistforthegood
38. B–Demandisperfectinelastic
39. B–Perfectlyelasticwouldbecompletelyhorizontal
40. D–Perfectlyinelasticwouldbecompletelyvertical
41. C–Increasesby30%
Whenagoodisaluxury,itmeansthatincomeelasticityofdemandisgreater
than1.
ES =
%ΔQd
%ΔI
YouhavebeenaskedtosolveforthepercentchangeinQd.Youweregiventhat
incomeincreasedby20%,soyouknowthepercentagechangeinI.Youdonot
knowtheexactvalueofincomeelasticity;however,youknowthatithastobe
greaterthan1sincethegoodisaluxury.Youcanpluginanyvaluegreaterthan1
forincomeelasticityandyouwillfindthatthepercentchangeinQdwillbe
greaterthan20%.Ifyouplugin1.5youwillgettheanswer,increaseby30%.The
percentchangeinQdwillonlygoupby30%iftheincomeelasticityisexactly
1.5;however,itisn’tpossibletogetanyoftheothervaluesasanswersusinga
numbergreaterthan1forincomeelasticity.
1.5 =
%ΔQd
0.20
%ΔQd = 0.30 = 30%
Anotherwaytothinkaboutthisisthatwhenagoodisaluxury,thepercent
changeinQdwillbemoredramaticthanthepercentchangeinincome.
42. A–Theyaresubstitutesbecausegoodsaresubstituteswhencross-price
elasticityispositive.
43. B–Thesubsidyislessthantheexternalbenefitoftheflushots.
ShortAnswer
1. 1.5Elastic
Q/LM//
EP=
÷
(M//NQ/)/K
[L\
(\N[)/K
=–1.5
|EP|=1.5
2. 0.15Inelastic
EP=
M]/LK//
(M]/NK//)/K
÷
M0LM/
(M0NM/)/K
=–0.15
|EP|=0.15
3. 1Unitelastic
EP=
K,///–M,///
(K,///NM,///)/K
|EP|=1
÷
K\L\/
(K\N\/)/K
=–1
4. Thisproblemistestingtomakesurethatyouknowthatdemandwillbecome
moreelasticasmoreandmoretimepasses.Thecurrentdemandcurveisa
perfectlyinelasticdemandcurve.Weknowthisbecausethecurveisa
completelyvertical.Asdemandbecomesmoreelastic,thedemandcurvewill
becomemorehorizontal.Allyouneedtodoisadrawadownwardsloping
demandcurvethatismorehorizontalthanthecurrentdemandcurve.
5. Charlieshouldbeexperiencingdiminishingmarginalutilityasheconsumesmore
andmorepiecesofpizza;however,hismarginalutilityisincreasingasheeats
moreandmorepizzauntilthe6thpiecewhentotalutilitydropstobenegative
whichdoesn’treallymakesense.Theconceptofdiminishingmarginalutilitysays
thatmarginalutilityshoulddecreaseasheeatsmoreandmorepizza.
#ofpieces
ofpizza
1
2
3
4
5
6
Total
utility
3
8
15
24
36
-2
Marginal
utility
3
5
7
9
12
-38
6. $88,000
Revenue=$420,000
Explicitcosts=$100,000+$12,000+$140,000+$75,000+$5,000=$332,000
Accountingprofit=$420,000–$332,000=$88,000
7. –$42,000
Revenue=$420,000
Explicitcosts=$100,000+$12,000+$140,000+$75,000+$5,000=$332,000
Sincewearenowsolvingforeconomicprofitweneedtofindthetotalimplicit
costsinadditiontothetotalexplicitcosts.Implicitcostsaretheowner’s
opportunitycostsofrunninghisbusiness.
1) Theownercouldearn$16,000ayearrentingthespacethebarisinas
twoofficesat$8,000peryeareach.
2) Theownerwouldhaveearned4%interestonthe$100,000inhissavings
accountifhedidn’ttakethemoneyoutofthesavingsaccounttoinvest
inthebusiness.Thislostinterestisanopportunitycost.Theamountof
interesttheownerwouldhaveearnedisfoundbymultiplying$100,000
bytheinterestrateof4%.Thismeanstheopportunitycostofspending
the$100,000was$4,000($100,000x0.04=$4,000).
3) Theownergaveuphissalaryof$110,000ayeartorunthebarsoitisan
opportunitycost.
Implicitcosts=$16,000+$4,000+$110,000=$130,000
Economicprofit=$420,000–$332,000–$130,000=–$42,000
8. 3Gatoradeand2IceCream
Thefirstdecisionthatyouneedtomakeisifyouwantyourfirstpurchasetobe
Gatoradeoricecream.Youcanusetheequalmarginalprincipleequationtodetermine
whichwillgiveyoumoreutilityperdollarspent.
1stGatorade=40/$2=20
1sticecream=66/$3=22
Yourfirstpurchasewillbeicecreambecauseicecreamgivesyou22utilitypointsper
dollarspentandGatoradeonlygivesyou20utilitypointsperdollarspent.Youhavea
totalbudgetof$12andyoujustspent$3onicecreamsoyoustillhave$9tospend.
Thenextstepoftheproblemisthespotwherepeoplemostcommonlymakemistakes.
Youcannoweitherbuyyour1stGatoradeoryour2ndicecream.Oftenpeoplewilljump
tocomparingthe2ndGatoradetothe2ndicecream;however,youhavenotpurchase
your1stGatoradeyetsoyouneedtodecideifyouwanttopurchaseyour1stGatoradeor
yoursecondicecream.
1stGatorade=40/$2=20
2ndicecream=42/3=14
Youwillpurchaseyour1stGatoradebecauseyour1stGatoradegivesyou20utilitypoints
perdollarandyoursecondicecreamonlygivesyou14utilitypointsperdollar.Youjust
spent$2onGatoradesoyouhave$7lefttospend($9-$2=$7).
2ndGatorade=32/$2=16
2ndicecream=42/3=14
Inthisstepyouarecomparingpurchasingyour2ndGatoradetopurchasingyour2ndice
creambecauseyouhavepurchased1Gatoradeand1icecreamatthispoint.Your2nd
Gatoradegivesyoumoreutilityperdollarspentsoyouwillpurchasea2ndGatoradefor
$2soyouhave$5lefttospend($7-$2=$5).
3rdGatorade=24/$2=12
2ndicecream=42/3=14
Youpurchaseda2ndicecreambecauseyoursecondicecreamgaveyoumoreutilityper
dollarthanyour3rdGatorade.Youjustspent$3onicecreamsoyouhave$2leftto
spend($5-$3=$2).
3rdGatorade=24/$2=12
3rdicecream=24/$3=8
Youwilluseyourlast$2topurchaseyour3rdGatorade.YourthirdGatoradegivesyou
moreutilityperdollarthanyour3rdicecream.Additionally,youknewyourlastpurchase
wouldhavetobeonGatoradebecauseyouonlyhad$2leftsoyoucouldn’taffordto
purchasea3rdicecreamanyways.Youspentyourlast$2onyourthirdGatoradesoyou
havenowspentyourentirebudget.
Youwillpurchase3Gatoradeand2icecreamswithyourbudgetof$12.
9. $531
FV=$500(1+0.02)3=$531
10. $220
FV=$100(1+0.14)6=$220
11. $546
PV=$800/(1+0.10)4=$546
12. $3,770
PV=$4,000/(1+0.03)2=$3,770
13. $3,770
PV=$10/0.08=$125
14. $71
PV=$12/0.17=$71
15. Boththesociallyoptimalpriceandquantityaregreaterthanthemarketprice
andquantity.
16. Thesociallyoptimalquantityislessthanthemarketquantity;however,the
sociallyoptimalpriceisgreaterthanthemarketprice.
17. 1/7,Inelastic
Qd1=15
Qd2=13
P1=$1
P2=$3
EP=
𝟏𝟑L𝟏𝟓
(𝟏𝟓N𝟏𝟑)/𝟐
L𝟐
$𝟐
𝟏𝟒
𝟐
L𝟐
L𝟏
𝟏𝟒
𝟕
÷
$𝟑L$𝟏
($𝟏N$𝟑)/𝟐
EP= ÷ EP= = 𝟏
|EP|= 𝟕
Thepriceelasticityofdemandisinelasticbecauseitisbetween0and1.
18. 1,UnitElastic
Qs1=2
Qs2=6
P1=$1
P2=$3
Es=
𝟔L𝟐
(𝟐N𝟔)/𝟐
𝟒
$𝟐
𝟒
𝟐
÷
$𝟑L$𝟏
($𝟏N$𝟑)/𝟐
Es= ÷ Es=𝟏
Thepriceelasticityofsupplyisunitelasticbecauseitisequalto1.
19. 9/23,Inelastic
Qd1=12
Qd2=11
P1=$4
P2=$5
EP=
EP=
EP=
𝟏𝟏L𝟏𝟐
(𝟏𝟐N𝟏𝟏)/𝟐
L𝟏
𝟏𝟏.𝟓
÷
$𝟓L$𝟒
($𝟒N$𝟓)/𝟐
$𝟏
÷ L𝟒.𝟓
𝟏𝟏.𝟓
𝟒.𝟓
L𝟗
= 𝟐𝟑
𝟗
|EP|= 𝟐𝟑
Thepriceelasticityofdemandisinelasticbecauseitisbetween0and1.
20. 1,Unitelastic
Qs1=8
Qs2=10
P1=$4
P2=$5
Es=
𝟏𝟎L𝟖
(𝟖N𝟏𝟎)/𝟐
𝟐
$𝟏
𝟗
𝟒.𝟓
÷
$𝟓L$𝟒
($𝟒N$𝟓)/𝟐
Es= ÷ Es=𝟏
Thepriceelasticityofsupplyisunitelasticbecauseitisequalto1.
21. Theincreasedpriceoffootballticketswillcauseustoconsumefewerfootball
tickets.However,itisambiguousifwewillconsumemoreorlesstacos.
Incomeeffect–Sincethepriceoffootballticketshasincreased,itisasifyour
incomedecreased.Theincreasedpriceoffootballticketshasmadeyoupoorer
soyouwillconsumelessofbothtacosandfootballtickets.
Incomeeffect=LesstacosandLessfootballtickets
Substitutioneffect–Theincreasedpriceofthefootballticketshascausedtacos
tobecomerelativelycheaperthanfootballtickets.Thismeansyouwillconsume
moretacosandlessfootballtickets.
Substitutioneffect=MoretacosandLessfootballtickets
Wecanseethattheincreasedpriceoffootballticketswillcauseustoconsume
fewerfootballtickets.However,itisambiguousifwewillconsumemoreorless
tacos.