Question

1) The market for backyard grills consists of four individuals: Abe, Betsy, Chloe, and Daniel. Abe considers himself a grill-master, and a backyard grill is an absolute necessity. Abe willing to pay $400 for a grill. Betsy is a meat-lover who is honing her grilling skills. Betsy is willing to pay $350 for a grill. Chloe loves a good grilled steak and is willing to pay $320 for a grill. Daniel enjoys grilled shrimp and believes that grilling his own shrimp is cheaper than eating out. Daniel is willing to pay $200 for a backyard grill. If the market price of grills increases from $310 to $350 then:

• total consumer surplus would fall by $120.

• Abe, Betsy, Chloe, and Daniel will each experience an increase in consumer surplus.

• Chloe and Betsy will experience a decrease in consumer surplus, but Abe's consumer surplus will increase.

• total consumer surplus would fall by $90.

• Chloe will experience a decrease in consumer surplus, but Abe and Betsy will experience an increase in consumer surplus.

2)

Consider the market for motorized golf carts. Suppose that there and an increase in the price of oil, which makes it more expensive to manufacture golf carts, and makes it more expensive for owners to operate golf carts.

• The equilibrium price will increase, but the effect on equilibrium quantity is indeterminate.

• The equilibrium quantity will increase, but the effect on the equilibrium price is indeterminate.

• The equilibrium quantity will decrease, but the effect on the equilibrium price is indeterminate.

• The equilibrium price will decrease, but the effect on equilibrium quantity is indeterminate.

• Both the equilibrium price and equilibrium quantity will decrease.

3)

1 2 6 7 Trucks 1 2 3 4 Trucks 3 4 5 Country A Country B

Refer to the figure shown, which represents the production possibilities frontiers for Countries A and B. Considering both country's production possibilities frontiers, we can conclude that Country B will specialize in:

• trucks, and be willing to accept no more than 3 cars for each truck.

• trucks, and be willing to accept no fewer than 3 cars for each truck.

• cars, and be willing to give no fewer than 3 cars for each truck.

• cars, and be willing to give no more than 3 cars for each truck.

• None of the options.

4) A method for allocating scarce goods arising from the imposition of an effective price ceiling is:

• to offer scarce goods on a first-come, first-served basis.

• to use ration coupons that allocate a predetermined quantity to each household.

• to distribute scarce goods to friends and family of the producers.

• a black market.

• All of these methods are used to allocate scarce goods.

Answer 1

1) at a price of 310, Abe, Betsy and Chloe buy grills and derive the following consumer surplus

Abe 400-310 = 90

Betsy 350-310 = 40

Chloe 320 - 310 = 10

Total = 140

when the price goes up to 350, only Abe and Betsy are the buyers and their consumer surplus is

Abe 400-350 = 50

Betsy 350-350 = 0

Total = 50

Hence consumer surplus has fallen by 90

2) with increase in production cost, supply curve will shift leftwards (less supply at same price). Since oil is a complementary good for the cart, demand curve will shift leftwards (implying less demand for same price of cart). So equilibrium quantity will fall but the impact on equilibrium price will be indeterminate

3) since it is relatively cheaper to produce trucks in country B (it costs only 3 cars, whereas it costs 5 cars to produce a truck in country A), it will specialize in trucks. Since it can get 3 cars if it foregoes producing one truck, it will accept no less than 3 cars per truck while trading with country A. So the right answer is B

4) right answer is the second one, which is allocating a predetermined quantity to each household by using ration coupons.