EC-252-I01: Principles of Microeconomics
Summer 2017
Due Date: Wednesday, July 5, 2017
Name: _________________________________________________________ Simply copying answers from any source, including the textbook or notes,
will not be greeted with a high grade. Ignoring parts of a question is not an
advisable strategy. The exam will be graded for the accuracy and precision
of the economic and mathematical arguments and evidence provided. The
grading will also incorporate your proper command and usage of the
English language • (25 points) Explain the producer’s problem using as much detail as
possible. Your answer should include an explanation of the problem
itself, how they solve it graphically, how price changes affect
production decisions, and why prices provide incentives for
producers. Use both straight line (individual) and bowed out
(societal) PPFs to illustrate the idea. Feel free to incorporate graphs,
drawings, and diagrams relevant to the problem. Use made up
production capabilities and prices if you wish, too. • (25 points) Explain the consumer’s problem in as much detail as
possible. Your answer should include an explanation of the problem
itself, brief description of ICs and their properties, how consumers
become “happier,” how price or income changes can affect their
purchasing decisions, and why every consumer solving their
consumer problem individually creates a Pareto efficient outcome for
society. Feel free to incorporate graphs, drawings, and diagrams
relevant to the problem. Use made up income, prices, and happiness
levels if you wish, too. • (15 points) Why are prices awesome? What relationship do prices
have to the consumer and producer problems, and how do prices
serve as the “glue” that connects that two problems and brings about
what economists call equilibrium? Explain Milton Friedman’s
description of the market for pencils and how it ties into the
consumer and producer problems. • (15 points) Devaughn and Grace can produce forks and spoons
according to the following schedule: Forks
Spoons Devaughn
24
12 Grace
39
3 • Who has an absolute advantage in producing spoons?
• Who has an absolute advantage in producing forks? • What is Devaughn’s opportunity costs of producing 1 spoon?
• What is Grace’s opportunity cost of producing 1 spoon?
• Who has a comparative advantage in producing spoons?
• What is Devaughn’s opportunity costs of producing 1 fork?
• What is Grace’s opportunity cost of producing 1 fork?
• Who has a comparative advantage in producing forks?
• If Devaughn makes 24 forks, how many spoons does he make?
• If Devaughn makes 12 forks, how many spoons does he make?
• If Devaughn makes 18 forks, how many spoons does he make?
• If Devaughn makes 9 spoons, how many forks does he make?
• If Grace makes 1 spoon, how many forks does she make?
• If Grace makes 39 forks, how many spoons does she make?
• If our society (made up of these two people) makes 15 spoons,
how many forks does it produce? • (10 points) Sernie Banders wins an election in a land far, far away,
promising free stuff to the entire population. Upon taking office, he
confiscates all private property in the country, outlaws the price
system, and redistributes all goods in an equal manner to every
member of the population. Every citizen receives the exact same
allotment of transportation, housing, food, education, etc. Sernie
promises to continue this regime into the future. All producers will
be asked to continue their previous production levels, but their
output will be delivered to government offices for redistribution
immediately upon production. Using both the consumer and
producer sides, explain why the future of this country is quite grim. • (10 points) Budget constraint for 3 goods
• Write down the budget constraint for a consumer who is able
to purchase three goods in his economy. He can buy corn (C),
wheat (W), and barley (B). The price of those items is PC, PW,
and PB, respectively, and the consumer has an income of Y to
spend. He will spend all of his money on those three goods.
• Are the following bundles of (C, W, B) affordable if PC = $6, PW =
$8, PB = $4, and Y = $110? Circle the correct answer for each of
the 5 bundles.
• (7, 6, 5)
NO
spare YES with $ to spare YES with no $ to YES with $ to spare YES with no $ to • (4, 4, 14)
NO
spare • (5, 5, 5)
NO
spare YES with $ to spare YES with no $ to YES with $ to spare YES with no $ to YES with $ to spare YES with no $ to • (6, 1, 12)
NO
spare • (10, 3, 5)
NO
spare

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