ECON2113 L1 & L2 Microeconomics, 2017 Fall Midterm

Instructor : Wooyoung Lim Date: October 21 (Saturday) 11:00am-1:00pm

Declaration of Academic Integrity

I confirm that I have answered the questions using only materials specifically approved for use in this examination,
that all the answers are my own work, and that I have not received any assistance during the examination.

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1. (80pts) Sara’s income is $12 a week. The price of popcorn is $3 a bag, and the price of cola is $1.5 a can.
Assume that both are normal goods. Sara’s best affordable point is illustrated in the following graph.

Cola Budget Line

8

Indifference Curves
H
I1
I0

0 4 Popcorn

a. (30pts) Explain why neither F nor H is the best affordable point by comparing MRS (Marginal Rate
of Substitution) and the relative price at points F , C, and H.

Suppose that the price of popcorn rises to $6 a bag. All other things remain the same.

b. (50pts) Assume that the popcorn is an inferior good (but not a Giffen good). Graphically demonstrate
Sara’s optimal consumption choice and demonstrate the price effect for the popcorn consumption. In
particular, separate the income effect and the substitution effect clearly.

2. (80pts) The following is part of the CNN.com article “Washing machine wars: U.S. backs Whirlpool in trade
fight with Samsung,” October 6, 2017. Please read it carefully and answer the questions below.

“Michigan-based Whirlpool has scored a trade victory that could allow President Trump to limit
the number of washing machines sold in the U.S. by Samsung and LG. The U.S. International Trade
Commission voted 4-0 in Whirlpool’s favor on Thursday, ruling that a “surge” of washing machines
from Samsung and LG have seriously injured domestic manufacturers. .... ..... The statue allows
the commission to recommend remedies – such as specific tariffs or quotas – to the president. The
commission will make its recommendations before the end of the year, and Trump will have roughly
two months to consider the panel’s advice.”

1
 Suppose that the U.S. domestic market demand for washing machine is

P = 750 − 2QD . (1)

There is one domestic washing machine producer in the U.S. market with the following individual supply:

P = 250 + 3QdS . (2)

There are two foreign washing machine producers in the U.S. market, each of which has the following individual
supply:
P = 100 + 3QfS . (3)

The price of washing machine is expressed in dollars and the quantity is expressed in the number of machine
per day. Assume that 1) all producers produce identical products and 2) any producer in this market behaves
as a price taker.

a. (20pts) Consider the situation in which the U.S. washing machine market is opened to the foreign
producers without any trade barrier. Draw a graph of the U.S. washing machine market, label the axes
and the curves, and mark in the equilibrium price and quantity. Calculate the market equilibrium price
and quantity.
b. (20pts) Calculate the consumer surplus, the producer surplus, and the total surplus.
c. (20pts) Suppose that the government in this domestic market imposes a tariff of 90 dollars a machine
to the foreign suppliers. Calculate the market equilibrium price and quantity.
d. (20pts) Graphically demonstrate the effect of the tarriff policy on the welfare of the society (i.e. consumer
surplus, producer surplus, and social welfare.) Who are the winners and the losers from this policy?

3. (40pts) The following is part of the PCWorld.com article “Grey market iPhone 6 prices plummet in China,
as Apple prepares official sales,” October 13, 2014. Please read it carefully and answer the questions below.

“After trying to charge upward of US$2,000 for an iPhone 6, grey market dealers in China are
slashing prices as Apple prepares to begin sales of the product in the country. Apple will finally
launch its iPhone 6 and iPhone 6 Plus in mainland China on Friday, a month after sales began in
the U.S. and several other markets including Hong Kong. In the meantime, grey market dealers
in China had been offering their own stock of iPhone 6 models, smuggled in from other countries.
Back on Sept 19, the day of the iPhone 6 launch, merchants in Beijing estimated the first incoming
units could reach up to $3,000 or more. ..... But grey market dealers have since been cutting prices
on the iPhone 6 models, after Apple made it known late last month that the product would arrive
soon.”

a. (30pts) Using the demand-supply curves analysis, explain the sharp price-drop in the iPhone 6 grey
market after the Apple’s announcement about the future official release of the iPhone 6 in China.
b. (10pts) Discuss whether the price-drop becomes sharper or not as the supply curve in the grey market
becomes more elastic.

Please hand in this exam paper together with your exam book. Thanks!