Faculty of Business and Economics Afif Hamad, PhD and Ibrahim Awad, PhD

Department of Economics Spring 2019-2020

Course: Principles of Microeconomics Date: June 7, 2020
Final Exam

Student Name: _______________________________ Student No: _________________

NB: Answer the following questions on an external booklet and submit it into e-class.

Q1: (10 marks)

1- Explain diagrammatically the various ways in which a price ceiling on gasoline that is set
below the equilibrium price would make buyers and sellers of gasoline better off or worse
off. What would happen to total surplus and deadweight loss in this market?

2- Rain spoils the strawberry crop, the price rises from $4 to $6 a box, and the quantity
demanded decreases from 1,000 to 600 boxes a week.
a. Calculate the price elasticity of demand over this price range.
b. Describe the demand for strawberries.

3- If the quantity of dental services demanded increases by 10 percent when the price of
dental services falls by 10 percent, is the demand for dental services inelastic, elastic, or
unit elastic? Why?
4- The Grip of Gas drivers are ranked as the least sensitive to changes in the price of
gasoline. For example, if the price rose from $3 to $4 per gallon and stayed there for a year
purchases of gasoline would fall only about 5 percent.

a. Calculate the price elasticity of demand for gasoline. Is the demand for gasoline elastic,
unit elastic, or inelastic?
b. Explain how the price rise from $3 to $4 a gallon changes the total revenue from
gasoline sales.

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Q2: (10 marks)

1- Spam Sales Rise as Food Costs Soar Sales of Spam are rising as consumers realize that
Spam and other lower-cost foods can be substituted for costlier cuts of meat as a way of
controlling their already stretched food budgets.

a. Is Spam a normal good or inferior good? Explain.

b. Would the income elasticity of demand for Spam be negative or positive? Explain.

2- Assume that Mohammed has $100 per month to divide between dinners at a Palestinian
restaurant and evenings at Jordan, a local club. Assume that going to Jordan costs $20 and
eating at the Palestinian restaurant costs $10. Suppose Mohammed spends two evenings at
Jordan and eats six times at the Palestinian restaurant.

a. Draw Mohammed’s budget constraint and show that he can afford six dinners and two
evenings at Jordan.
b. Assume that Mohammed comes into some money and can now spend $200 per month.
Draw his new budget constraint.
c. Draw Mohammed’s budget constraint and indifference curve with shown the optimal
choice (Consumer Utility-Maximizing Equilibrium) for him.
d. Use your answers shown above to write the utility-maximizing rule for Mohammed.
e. As a result of the increase in income, Mohammed decides to spend eight evenings at
Jordan and eat at the Palestinian restaurant four times. What kind of a good is Palestinian
food? What kind of a good is a night at Jordan?

Q3: (10 marks)

1- The long-run average cost curve for an industry is represented in the graph below.

a. Add short-run average cost curves and short-run marginal cost curves for three firms in
this industry, with one firm producing an output of 10,000 units, one firm producing an
output of 20,000, and one firm producing an output of 30,000.
b. Label these as Scale 1, Scale 2, and Scale 3, respectively. What is likely to happen to the
scale of each of these three firms in the long run?

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2- A firm’s cost curves are given in the following table.

Q4: (10 marks)

1- Two factories in the same town hire workers with the same skills. Union agreements
require factory A to pay its w orkers $20 per hour, while factory B must pay $12 per hour.
Each factory hires the profit-maximizing number of workers. Is the allocation of labor
between these two factories efficient? Explain why or why not.

2- Explain why resources are allocated efficiently among firms and why output is
distributed efficiently among households in perfectly competitive markets.

3- Prior to 1995, Palestine had only one Juice producer, a government-owned monopoly
called Palestine Juice. Suppose that while it was a monopoly, the company was run in a
way to maximize profit for the government. That is, assume that it behaved like a private,
profit-maximizing monopolist. Assuming demand and cost conditions are given on the
following diagram, at what level would Palestine Juice have targeted output and what price
would it have charged? Suppose that while it was a monopoly, Palestine Juice decided to
compete in the highly competitive Jordanian market. Assume further that Palestine

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maintained import barriers so that Jordanian producers could not sell in Palestine but that
they were not immediately exchanged. Assuming Palestine Juice could sell all that it could
produce in the Jordanian market at a price P = P Jordan, make use of the graph below to
determine the following:

a. Total output
b. Output sold in Palestine
c. New price in Palestine
d. Output sold in Joedan
e. Total profits
f. Total profits on Jprdanian sales
g. Total profits on Palestine sales

End-of-Questions
All the best of luck and success!