Economics 101 Spring 2020 Test #3 Answer each question on your paper and/or in a computer file. When drawing graphs, be sure to label all curves and axes. Be sure to put your name somewhere in your answers. I. Calculation and Analysis Problems 1. Because of the trade war with China, tariffs of 25 percent have been imposed on products made in China and imported into the U.S., including motorcycles. a. Show graphically the impact of this tariff on the market for motorcycles in the U.S. Identify the areas of consumer and producer surplus before and after the tariff and the deadweight loss that results. Who wins and who loses because of the tariff? b. Suppose that the price of motorcycles was $1,600 before the tariff and $2,000 after the tariff. U.S. production of motorcycles was 100,000 before the tariff and 110,000 after. U.S. demand for motorcycles was 300,000 before the tariff and 280,000 after. Based on these numbers, calculate the value of the deadweight loss. b. Do you favor free trade or do you think there should be some restrictions? In your answer, address at least two of the arguments for or against free trade. Do the same in discussing your opinion about globalization. (11 pts.) 2. Suppose the United States and the European Union (EU) have the following production possibilities: Cars Movies US 20,000 5 EU 12,000 2 a. What is the opportunity cost for cars and for movies in each economy? b. Which economy has the comparative advantage in car production and which in movie production? c. Discuss two reasons why the economies might have a comparative advantage in this case? d. Choose terms of trade that would make both economies better off. e. Discuss two reasons why cars and movies might be produced in both economies instead of having complete specialization. (9 pts.) 3. Suppose a consumer has $130 to spend on champagne (C) or perfume (P). Champagne costs $10 a glass while perfume costs $20 an ounce. The table below show the utility associated with the consumption of the two products: QCTUCQPTUP 0 0 0 0 1 20 1 50 2 38 2 90 3 53 3 120 4 65 4 140 5 75 5 150 6 83 6 155 a. Calculate the MU and MU / P for each product. b. Explain how this data illustrates the Law of Diminishing Marginal Utility. c. What is the utility maximizing combination of champagne and perfume for this consumer? d. Show that the condition for utility maximization is met in this case. (5 pts.) 4. Suppose a company has the following production function: LQ 0 0 1 8 2 20 3 27 4 32 5 35 6 36 a. Calculate the MPL and APL for each level of labor. b. Show graphically the MPL and APL curves in this situation. Show the curves in general; there is no need to plot the data exactly. c. Explain how the data and the graph illustrates the Law of Diminishing Returns. Explain the reasons for the Law of Diminishing Returns. d. Explain how the relat.

1. Economics 101
Spring 2020
Test #3
Answer each question on your paper and/or in a computer file.
When drawing graphs, be sure to label all curves and axes. Be
sure to put your name somewhere in your answers.
I. Calculation and Analysis Problems
1. Because of the trade war with China, tariffs of 25 percent
have been imposed on products made in China and imported
into the U.S., including motorcycles.
a. Show graphically the impact of this tariff on the market for
motorcycles in the U.S. Identify the areas of consumer and
producer surplus before and after the tariff and the deadweight
loss that results. Who wins and who loses because of the tariff?
b. Suppose that the price of motorcycles was $1,600 before
the tariff and $2,000 after the tariff. U.S. production of
motorcycles was 100,000 before the tariff and 110,000 after.
U.S. demand for motorcycles was 300,000 before the tariff and
280,000 after. Based on these numbers, calculate the value of
the deadweight loss.
b. Do you favor free trade or do you think there should be
some restrictions? In your answer, address at least two of the
arguments for or against free trade. Do the same in discussing
your opinion about globalization.
(11 pts.)

2. 2. Suppose the United States and the European Union (EU)
have the following production possibilities:
Cars
Movies
US
20,000
5
EU
12,000
2
a. What is the opportunity cost for cars and for movies in
each economy?
b. Which economy has the comparative advantage in car
production and which in movie production?
c. Discuss two reasons why the economies might have a
comparative advantage in this case?
d. Choose terms of trade that would make both economies
better off.
e. Discuss two reasons why cars and movies might be
produced in both economies instead of having complete
specialization.
(9 pts.)
3. Suppose a consumer has $130 to spend on champagne (C)
or perfume (P). Champagne costs $10 a glass while perfume
costs $20 an ounce. The table below show the utility associated
with the consumption of the two products:

3. QCTUCQPTUP
0 0 0 0
1 20 1 50
2 38 2 90
3 53 3 120
4 65 4 140
5 75 5 150
6 83 6 155
a. Calculate the MU and MU / P for each product.
b. Explain how this data illustrates the Law of
Diminishing Marginal Utility.
c. What is the utility maximizing combination of
champagne and perfume for this consumer?
d. Show that the condition for utility maximization is
met in this case.
(5 pts.)
4. Suppose a company has the following production function:
LQ
0 0
1 8
2 20
3 27
4 32
5 35
6 36
a. Calculate the MPL and APL for each level of labor.

4. b. Show graphically the MPL and APL curves in this
situation. Show the curves in general; there is no need to plot
the data exactly.
c. Explain how the data and the graph illustrates the
Law of Diminishing Returns. Explain the reasons for the Law of
Diminishing Returns.
d. Explain how the relationship between marginal and
average values applies in this situation.
(8 pts.)
5. Suppose you quit a job that pays $50,000 to start a
business that has labor costs of $100,000. You rent an office
and pay a total of $30,000 a year to your landlord. You take out
a loan of $75,000 at an interest rate of 8% to help finance the
business. Those are your only costs. What are your total explicit
costs, total implicit costs, and total costs overall?
(3 pts.)
6. Costs
a. Fill in the missing values in the table below:
QFCVCTCMCAFCAVCATC
0 120 0
1 120 100
2 120 180

5. 3 120 240
4 120 320
5 120 420
6 120 540
b. Show graphically the relationship between the FC, VC, and
TC curves.
c. Show graphically the relationship between the AFC, AVC,
ATC, and MC curves.
(11 pts.)
II. Graphing and Discussion Questions
7. Suppose the price of a product that is an inferior good
increases.
a. Explain how the income and substitution effects
would work in this situation and lead to the Law of Demand.
b. Show graphically how the market demand curve
would be determined from individual demand curves.
(5 pts.)
8. Walmart has put a lot of small retailers out of business
because they can sell a lot of products at a lower price than the

6. smaller retailers.
a. Show graphically and explain how the concept of
economies of scale can be used to explain this situation.
Indicate where the minimum efficient scale is on the graph.
b. Discuss two reasons why Walmart might have
economies of scale compared to smaller retailers.
c. Indicate on the graph in (a) the region of
diseconomies of scale. Explain why Walmart might experience
diseconomies of scale.
(9 pts.)
9. Each of the following is an example of either a social
influence on decision making or a mistake when making
decisions. Indicate specifically what that social influence of
mistake is and briefly explain what the social influence involves
or why it is a mistake in decision making.
a. People make a New Year’s resolution to lose weight.
b. Someone gets a new job and buys a Giorgio Armani
suit.
c. A retailer refuses to sell a product for less than what
they paid for it from a supplier.
d. Online dating is one of the fastest growing parts of
the Internet.
(4 pts.)