Fall 2009 MBA Exam 1: Microeconomics Total Points: 100 Name: KEN Supply and Demand Be sure to draw clear diagrams, explain which factors of supply and/or demand are affected, which curve they affect and how (ie., which way it shifts), and, finally, write your “answer” out to the side of your diagram. 1. Part of the causes of the financial crisis was new securitization of financial instruments, New | technology significantly lowered the cost of developing and providing these instruments. | ‘a. (5 points) Show the effects this technological development in the market for financial | instruments market. jeosts = TS Ban Financia) => \ lncleuments b. (5 points) Many have noted that it was these cheaply available instruments caused their widespread adoption. Is this reflected in your answer in part (a)? Explain. AD Widespread Adap rm 2 TB Nes. Doe to vP, Thue Ts an Mm par 1@ Zldons Suppose the price of traditional textbooks increases over the coming years. Ars c. (5 points) What is the effect of this in the market for university courses? a | e RP ooks™ MComglemoh > ud Future 4 Pooks” Future UD > YP e Pe SyPuy, RE os down | \ D _—_—_———, | @ &, Q.,. Q | ‘ Universe < ocak = Coors greet OPTION 4 Vodou |4d. (5 points) What is the effect pf this in the market for e-textbooks? oP é€ option 4 OPriow 2 Fove TPebeels ~ AB ee? PRetecks aes ik ; i Ree > VS i fe . [rein] “ye 2. *Cashefor-clunkers" was a recent prbgram that gave individuals extra cash in their pocket for trading in old cars and buying newer, more fuel-efficient cars. While this was like cash in the pocket of consumers, it was also a temporary program. Car companies stated that they knew as soon as the program ended, car prices would fall rapidly. a. (5 points) Analyze the effect of this program in the market for cars. Cosh ta Pockets fncome ath & VPX Supplters > ds Qo & Be Meck b. (5 points) News papers reported that the price of cars skyrocketed during this program. Is this consistent with your analysis in part (a)? Explain. Wiklpuk mare nfocmebion, mre predict 7P wll MLAWAS tt covld qe ve) dows oc aot « change. thes, en trecense ta p tS congie heat wy the oe aA pact (CS). <6 oly ryan thek the octet YR Cos o ic ° UCTS was nruck bt 45 Than tha cheng Py sup! Iv con assert th shy coelbed3. Reforming health care is a major agenda item in the US these days. Many politicians have argued that we will have to raise taxes on companies (employers) to finance health care They argue that itis best to tax the companies since they can afford it and it doesn't place any additional burden on working families or consumers. As a concrete example, consider that companies making heart medicine are affected by the new tax. a. (5 points) Show the effects of the tax in these companies’ labor market. Bleck is to AP foc bugecs b | ps aad UP for celles to es Keo, VQ &Q b. (5 points) Show the effect in the market for heart medicine. S Elleck ts some os Lekore APE UPF LYS ees ure EVO ace 5 Th MO pearect ence ts ver adaahe - ThA oe Hee bo be bigger. ¢. (5 points) Based on your answers in parts (a) and (b), who bears more of the burden of the tax? Explain, Evaluate the pallid claims and explain your answer fully. ie (0), Frras 2 Workers shnre tha burden me eoce aeitlac S aoe D ace cebah' Wo ce kaste. La (b), Consumers Gear mere cmee ore less kectre aa suppleers. Polifteraas: Nes tk doen F burden on workers a Consumers, “te burden TS shered,howeuec, witty ficmeElasticity rises 4. Suppose the price of paperback books fs from $6.50 to $7.00 and the quantity demanded Ges\ises from 175 to 150. 1a. (5 points) Calculate the are price elasticity of demand. (ncdashye ¢. (5 points) What is the income elasticity of demand? Or] 50,000 _ ey oF @ (0.8) Ti330 * 0-44 4. (5 points) If incomes are projected to increase by 5% next year, by how much should suppliers expect demand for good X to change by? ~ BE° > %60- fe, )(@ar) - (o47)(s) MhO~ 4.85% 6. ‘The ABC Company manufactures AM/FM clock radios and sells on average 5,000 units (= $000 monthly at $70 each to retail stores. Its closest competitor produces a similar type of radio . 2.0 that sells for $50. Put sO a. (5 points) If the demand for ABC's product has an elasticity coefficient of -2, how many will it sell per month if the price is lowered to $65. Zo~ PES BAQ= (Ep{ZAP)* (2-20) ? BAP Py 40 POQz 14.81 P=68 Qy = Q (1b 181) GS-70 a = $000 (1,14@1) Tbs? 7 oko)" (es Ha i US a |.b. (5 points) The competitor decreases its price to $45. If cross-elasticity between the two radios is 0.3, what will ABC's monthly sales be? Por 99 bx 66,4 (MAP) = (3>(-10.83) Pus 48 Db Que - 3.16 45-50 Fie B59 00 = 10,52 Gy = $000 (1-.03le) | $250 Ry = 2") [C= 442.10 7, Manning Inc. is the leading manufacturer of garage doors. Demand for residential garage door sales depends, of course, on the rate of new house building activity, which in turn Qy > 20,000) depends on changes in income per capita. During the past year, Manning sold 20,000 garage P > (S00 | doors at an average price of $1,500 per door. In the coming year, disposable income per. _ © | capita is expected to increase from $32,000 to $34,000. Without any price change, Manning Dp 32000 Te, + 34000 expects current-year sales to rise to 22,000 units. QA, > 22000 a. (5 points) Calculate the arc income elasticity of demand. = 34000-32090 in, Jobe = Ee eree00 (20 > 06 | am WA 4.82 | on” Gk” 6.00 22000- 20,000 AQz V xfoo = 9.52, 2 Zopeaeeaeo} = b. (points) The company economist estimates that if the price of doors is increased by $100, they could sell 21,500 doors. What is the arc price elasticity and what would be the company's revenue? 7 B06 — \ E [ Biohe crue nm eeans | Qe 21,00 Re 1@00 2\$00- 22000 x09 = ~2,24 MWsQe= sere 294 (le00 - 1906 Reva R@, +(leeo/(+ 500 WEP= eps qreoo "(OP OMS = & 34,400, 000 2 c. (5 points) Ignoring the cost-side of things, should they raise the price even more? Explain completely. Nes because [Z| = 0.36 <\ => lacdebte pect gyd- curve. B+, [ea lL be ceceful not dy raise roo puch aad pass Xa felz) park 4d D- Cure.