Prin Quiz3 Answers

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Principles of Economics
Third Quiz Answers
Instructions (Read Carefully and Follow Precisely):
You have 45 minutes to complete this closed-notes, closed-book, 100-point exam. (You may use
a 1-sided 8.5x11” notes sheet and a calculator whose memory and programming are cleared.)
You must not collaborate with any other person in any way on this exam. You must not view
anyone else’s exam.
1. (15 points) There are only two countries in a hypothetical world—country X and
country Y, and only two goods can be produced—cheese and bread. Country X is 10
times better than country Y at producing cheese, and country X is 5 times better than
country Y at producing bread.
Question: According to the theory of comparative advantage, can the two countries
benefit from trade? If so, then explain why, and state which good each country should
export and which good each country should import. If no benefit from trade is possible,
then explain why not.
Country X has comparative advantage in cheese production; it should produce cheese,

exporting some of it for bread.
Country Y has comparative advantage in bread production; it should produce bread,

exporting some of it for cheese.
In this way, both countries can consume more of both goods (relative to a zero trade
situation)..
Author: Michael Francis Williams. Copyrighted material. All rights reserved. 1

Cooleconomics.com prin-quiz3-answers.pdf
2. (15 points) Jane has $200; she must decide how much of it to spend this year. Any
money that she doesn't spend will be deposited in a savings account, where it will earn
15% interest. She will spend her savings plus her earned interest next year. Jane has no
other source of income.
Jane maximizes her utility by saving $40 out of her $200 this year.
a) Graph Jane's intertemporal budget constraint. Include at least 4 numbers on
your graph.
b) Calculate how much Jane will spend next year.
$40 + 15% interest = $46
spending
next year 230
200
spending this year
3. (20 points) Complete the following table (show calculations for credit):
Q TFC TVC TC MC
0 ____ ____ ____ --
1 10 ____ 15 ____
Q TFC TVC TC MC
0 _10__ _0_ 10 --
1 10 __5__ 15 __5__

4. (20 Points) Biff has $6 to spend on Candy and Carrots. Candy is $2 each; Carrots are
50 cents each. Here is Biff's Marginal Utility info:
Units Consumed MU Candy MU Carrots

1 100 35
2 80 30
3 70 25
4 60 20
5 50 15
a) How many units of each good should the utility-maximizing Biff buy? Explain your
answer.
4 carrots and 2 candy. (Buying goods with highest MU/P until his income is gone)
b) Calculate Biff's total utility after consuming the products in (a) above.
35+30+25+20+100+80=290 utils
5. (10 Points) Buffy has purchased pretzels and pizza so that after her income has been
spent, her marginal utility from pretzels is 100 utils, and her marginal utility from pizza is
400 utils. Pretzels are $1 each; pizza is $5 each.
--Is Buffy maximizing her utility? Explain why or why not. If she is not, indicate
whether she should have bought MORE or FEWER pretzels and MORE or FEWER
pizzas. Also, be sure to precisely use the utility-maximizing rule in your response.
No, her marginal utility per dollar spent on pretzels (= 100/1 = 100) is greater than her marginal utility
per dollar from pizza ( = 400/5 = 80). She should have bought more pretzels and fewer pizzas.

6. (10 points) A firm is selling 100 units of output for $5 each. If it lowers the selling
price to $4 each then it will sell 200 units of output.
Calculate the price elasticity of demand for the firm’s output.
(100-200)/(100+200) / (5-4)/(5+4)
= -1/3 x 9/1 = -3
7. (10 points) Name two ways (consistent with our in-class discussion) that a country can
increase its rate of long term economic growth. Briefly explain how these things act to
increase long term economic growth.
Increase taxes or cut government spending or increase household saving. Any of these
will reduce interest rates, increase investment, increase the nation’s capital stock, and
increase growth of real GDP over the long term.

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Third Quiz Answers

Instructions (Read Carefully and Follow Precisely):

Country X has comparative advantage in cheese production; it should produce cheese,

Country Y has comparative advantage in bread production; it should produce bread,

Author: Michael Francis Williams. Copyrighted material. All rights reserved. 1

$40 + 15% interest = $46

0 --

Author: Michael Francis Williams. Copyrighted material. All rights reserved. 2

Units Consumed MU Candy MU Carrots

Author: Michael Francis Williams. Copyrighted material. All rights reserved. 3

Calculate the price elasticity of demand for the firm’s output.

Author: Michael Francis Williams. Copyrighted material. All rights reserved. 4

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