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UMGC - Rota u. Landstuhl Economics 203

Fall (ii) 2020 Evaluation 1

Last Name, First Name:

Evaluation 1 Score Summary

A. Multiple choice: +

Exercises: +

Total: +

B. Exercises/Short Answer/Critical Thinking (60 points; 15 points per question) (45 minutes) (So each of you may consult with other members of your group. However, you must upload your own Exercise-section answers to the corresponding Evaluation 1 (Exercise section) placeholder. These are not group answers, mind you. So you do not have to “go along” with the consensus, which might not always be the best strategy. Regardless, you’re free to do as you please.) Good luck.

1. Exercise/Short Answer Question #1 Score: (- = + /15)

Juan has $5 per day in his snack-food budget. It turns out that he purchases cashews and peanut bars. Each pack of cashews costs $2 while each peanut bar costs $1. The Table below summarizes Juan’s utility (satisfaction) received from the consumption of each of these two goods. (15 points)

(a) First, fill in the three missing cells “? (fill in)” found in the Total Utility (U) columns in Table below. (3 points; 1 point per each correct answer) (-

Cashews (C)	Total Utility (C)	Marginal Utility (C)	MU(C)/P(C)	Peanut Bars (P)	Total Utility (P)	Marginal Utility (P)	MU (P) / P(P)
0	0	------	-------	0	0	---------	----------
1	40	40	20	1	28	28	28
2	72	32	16	2	52	24	24
3	? (fill in)	28	14	3	? (fill in)	20	20
4	124	24	12	4	88	16	16
5	144	20	10	5	102	14	14
6	160	16	8	6	? (fill in)	12	12
7	172	12	6	7	122	8	8

(b) Then fill in the missing blanks in the following Table that asks you to decide what he’ll spend his money on first, second, third, and so on. For the “Cashews” and “Peanut Bars” columns, for each step simply write a “1” in the column that corresponds to Juan’s choice, leaving the other column blank. Further, for each step, list the amount spent on either “Cashews” or “Peanut Bars.” Note: if in a given step Juan is indifferent, place a “1” in the peanut bars column for that same step and then a “1” in the cashews column in the following step. (8 points; 1 point per each correct answer) (-

Steps	Peanut Bars (“1” if applies; leave blank, if not)	Cashews (“1” if applies; leave blank, if not)	Amount spent per step
1
2
3
4

(c) So what is Juan’s utility-maximizing bundle of cashews and peanut bars, given an income of $5? (4 points)

Answer:

2. Exercise/Short Answer Question #2 Score: (- = + /15)

Use the demand and supply framework we developed in class to analyze the market in each of the scenarios (a) through (d) outlined in the Table below. For each scenario, fill in each of the corresponding cells by identifying how the demand and/or supply curves shift (left, right, or no change) and what the effects on equilibrium price and quantity (increase, decrease, ambiguous) are. (15 points; one point per each correct answer) (-

Scenario	Market	Demand Curve	Supply Curve	Equilibrium Price	Equilibrium Quantity
(a)	Flavonol-rich Foods (berries, teas, apples, e.g.)
(b)	Wool in Bolivia
(c)	Hotel Stays in Turkey
(d)	Coffee

(a) A recent study claims that regular consumption of flavonal-rich foods (berries, teas, apples, e.g.) decreases blood-pressure levels.

(b) Bolivian peasants, who can use their lands to graze sheep for wool or for cultivating the high-protein grain quinoa, observe that the world price of quinoa decreases by 30%.

(c) Given decreased safety concerns, European summer tourists increase their visits to Spain next summer by 20%. Due to the effects of the pandemic, Spain’s hotel offerings fall by 10%.

(d) Coffee producers begin using only higher-priced, organically grown coffee beans. At the same time, NGOs mount an advertising campaign designed to inform coffee consumers of the dreadful working conditions and low pay of those employed in the developing countries that produce organically grown coffee beans.

.

3. Exercise/Short Answer Question #3 Score: (- = + /15)

One study shows that the long-run own-price elasticity of the demand for oil in U.S. = .5 (absolute value). (15 points)

(a) If the price of oil rises by 20%, by what percentage will the quantity of oil demanded fall? (4 points) (-

Answer:

(b) If the price of oil decreases by 10%, by what percentage will the quantity of oil demanded increase (4 points) (-

Answer:

(c) Assume environmentalists would like to see the U.S. reduce its long-run consumption of oil. By how much would the price of oil have to permanently increase in order to reduce U.S. oil consumption by 25%? (4 points) (-

Answer:

(d) The long-run own-price elasticity of oil in France = .6 (absolute value), one of the highest measured values in the industrialized world. Does this mean that France is better or worse than the U.S. at responding to long-run price changes? Why? (3 points) (-

Answer:

4. Exercise/Short Answer Question #4 Score: (- = + /15)

Critical Thinking (the purpose of this course!) (15 points)

We showed in our Week 3 class that subsidies are negative taxes. And argued that as such, the side of the market that is more inelastic receives a greater share of the subsidy than the side of the market that is less inelastic (i.e., more elastic). Similarly, in the case of a tax, of course, the side of the market that is more inelastic pays a greater share of the tax than the side of the market that is less inelastic, i.e., more elastic.

Let’s consider agricultural water subsidies in the sunny Central Valley of California, one of the most productive farming areas of the world. The soil is fertile, but water is scarce. Its supply depends primarily on seasonal streams that flow from the nearby Sierra Nevada Mountains that lie to the east, whose melting snow runoffs are increasingly unpredictable. Further, as the urban areas of northern and southern California have grown, farmers in the Central Valley are increasingly competing for water demanded by urban dwellers in the greater Los Angeles and San Francisco metropolitan regions.

Let’s consider specifically the demand and supply of cotton produced in the Central Valley. Yes, it is grown there, as it is in greater quantities in the American South (“King Cotton”) and around the world. Consider the diagram below that is a fairly good representation of the market for California-grown cotton, where Pe, Qe are the market-equilibrium price and quantity of cotton.

S

P

Pe

D

Qe Q (California-grown cotton) ( Q\

(a) Is the demand curve shown elastic or inelastic? (3 points) (-

Answer:

(b) Are goods with close substitutes more price elastic or inelastic? (3 points) (-

Answer:

Are there close substitutes to California-grown cotton in the U.S. and elsewhere if it is widely grown in the U.S. south and around the world?

Answer:

How does this help explain your answer to (a)?

Answer:

(c) Given your answers to (b), and examining again the diagram above, which side of the market, demand or supply, is more inelastic? (3 points) (-

Now consider the same (amended) diagram below.

S

S’ (with $ per-unit subsidy, s)

P

$ per unit subsidy, s

Pe

Pes

D

Qe Qes Q Q\

(d) The diagram above shows a subsidy, s ($ s per unit) paid to cotton growers, so that the new supply curve = S’. Pe, Qe are the original (pre-subsidy) equilibrium P and Q; Pes Qes, the post-subsidy equilibrium P and Q. (3 points) (-

Identify with an arrow and the letters “SC,” the share of the per unit subsidy received by consumers. So simply copy and past the blue arrow and below into the appropriate space in the diagram above and type in “SC” next to it.

“

Identify with an arrow and the letters “SP,” the share of the per-unit subsidy received by the producer. So simply copy and past the blue arrow into the appropriate space in the diagram above and type in the letters “SP” next to it.

(c) Given your answer to (d), explain why California cotton growers have been active proponents of cotton subsidies, receiving them since 1902! (3 points) (-

Answer:

So that’s it. Make sure to upload your Evaluation 1 (Exercise section) answers to the corresponding placeholder found under the Assignment folder. You must do so before signing off.

As for what’s up for next week, check the Announcement Board of our webpage. Enjoy your week.