Midterm #1 Study Guide Solutions

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120

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Economics

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Apr 3, 2024

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AGEC 120 Spring 2024 Midterm #1 Study Guide Solutions The first midterm will be held on Monday, February 12 th in Justin 109 at 1:30 PM. Basic calculators are allowed and you can bring a 3x5 index card with notes on both sides. The exam will consist of 25 multiple choice questions. The exam will cover material up to 02/07/2024, or lectures 1-9. This includes the slides, notes, games, and homework assignments 1 and 2. The following table contains important terms and concepts that you should be familiar with. Definitions and examples of these terms can be found in the lecture slides. Key Concepts Scarcity Factors that shift demand Macro vs Microeconomics normal vs. inferior good Market, Command, and Mixed Economy substitute vs. complement goods Positive vs Normative Statements Law of Supply Money and Barter Double coincidence of wants Shortage Supply Law of Demand Equilibrium Price Economic vs. Non-economic goods Equilibrium Quantity Utility, Utils, and Marginal Utility Equilibrium Diminishing Marginal Utility Demand Schedule Value Scale Supply Schedule Cardinal vs Ordinal Utility Demand Curve Market Supply Curve “Change in demand” vs. “Change in quantity demanded” “Change in supply” vs. “Change in quantity supplied” Willingness to Pay (WTP) Willingness to Accept (WTA) Factors that shift demand Factors that shift supply 1
The rest of the study guide contains questions that should serve as a guide for what will be on the exam. Note: you should also be familiar with the assignments and notes. Question 1. Consider a spot market for large feeder heifers of equal quality. Each buyer can buy at most one heifer and each seller can sell at most one heifer. Prices can only be set in units of $5. Suppose there are two buyers and one seller, their value scales given in the tables below. Buyer and Seller Value Scales Buyer 1 Value Scale Buyer 2 Value Scale Seller 1 Value Scale $150/cwt $140/cwt ($120/cwt) (A heifer) (A heifer) A heifer $145/cwt $135/cwt ($115/cwt) Note: parentheses around the item indicates the individual does not have it in their possession. Absence of parentheses indicates they do have it. What is Seller 1’s willingness to accept (min sell price) and what is each buyer’s willingness to pay (max buy price)? Fill in the table below. Sellers of Heifers Willingness to Accept ($/cwt) Buyers of Heifers Willingness to Pay ($/cwt) S1 $120 B1 $145 B2 $135 What is the equilibrium price range? To answer this question, we can construct demand and supply schedules based on the WTS and WTP tables. Remember the buy and sell rules. Buy Rule: if WTP≥ price , buy . Sell Rule: if price≥WTA , sell . Price ($/cwt) Sellers Buyers Quantity Supplied Quantity Demand ed Equilibrium? $115 -- B1,B2 0 2 No, 2
Shortage=2 $120 S1 B1,B2 1 2 No, Shortage=1 $125 S1 B1,B2 1 2 No, Shortage=1 $130 S1 B1,B2 1 2 No, Shortage=1 $135 S1 B1,B2 1 2 No, Shortage=1 $140 S1 B1 1 1 Yes $145 S1 B1 1 1 Yes $150 S1 -- 1 0 No, Supply=1 There are two equilibrium prices - $140 and $145. These are the prices at which quantity supplied (1) equals quantity demanded (1). Now suppose B2 exits the market. What is the new equilibrium price range? The new table is: Price ($/cwt) Sellers Buyers Quantity Supplied Quantity Demand ed Equilibrium? $115 -- B1 0 1 No, Shortage=1 $120 S1 B1 1 1 Yes $125 S1 B1 1 1 Yes $130 S1 B1 1 1 Yes $135 S1 B1 1 1 Yes $140 S1 B1 1 1 Yes $145 S1 B1 1 1 Yes $150 S1 -- 1 0 No, Supply=1 If B2 exits, the equilibrium price range is no $120 to $145. Question 2 . Now consider a spot market for large feeder heifers of equal quality with 4 buyers and 4 sellers. Each buyer can buy at most one heifer and each seller can sell at most one heifer. Seller’s minimum sell prices (WTA) are given in Table 1 and Buyers’ maximum buy prices (WTP) are given in Table 2. 3
Table 1 Table 2 Sellers of Heifers Willingness to Sell ($/cwt) Buyers of Heifers Willingness to Pay ($/cwt) S1 $120 B1 $145 S2 $125 B2 $135 S3 $135 B3 $125 S4 $140 B4 $115 Note: parentheses around the item indicates the individual does not have it in their possession. Absence of parentheses indicates they do have it. Use Table 1 and Table 2 to fill in the supply and demand schedules in Table 3. Table 3 Price ($/cwt) Sellers Buyers Quantity Supplied Quantity Demanded Equilibrium ? $120 S1 B1,B2,B3 1 3 No, Shortage=2 $125 S1,S2 B1,B2,B3 2 3 No, Shortage=1 $130 S1,S2 B1,B2 2 2 Yes, S=D $135 S1,S2,S3 B1,B2 3 2 No, Surplus=1 $140 S1,S2,S3,S 4 B1 4 1 No, Surplus=3 1. Find the equilibrium price and equilibrium quantity. Quantity Supplied equals quantity demanded (2) at $130, so this is the equilibrium price. Equilibrium Price = $130 Equilibrium Quantity = 2 Equilibrium Total Revenue = Price*Quantity = $130*2 = $260 2. Suppose S1 exits the market. What is the new equilibrium price? At the old equilibrium price by how much is there a shortage or surplus? 4
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