MANAGERIAL ECONOMICS MECO 6201

Midterm Exam (1.75 hours) Explain all answers!

1. What does it mean to say that every country has a comparative advantage at some product? Explain how is it that trade between countries allows total production to increase?

2. The following diagram represents an industry where the government has imposed a price ceiling at P2. What is the transfer from producers to consumers? What is the deadweight loss caused by this policy if the consumers with the highest values get the product? What is the smallest consumers surplus possible with the price ceiling?

   

3. True or False: Last year Americans spent over $4 billion dollars on video games. On the other hand, they spent only $2 billion dollars on bicycles. Therefore, Americans must get greater total value out of video games. Explain your answer.

4. If the government suddenly imposes a tax of 75 cents per pack of cigarettes, what determines how much of the tax will be paid by the consumer and how much by the producer? Would the analysis of how the tax is shared be any different if we examined the market 1 week after the tax was imposed versus 8 months after the tax?

5. Assume that a vaccine for AIDS is developed, and that the drug company that develops it is given a patent and also attempts to maximizes profits. Do you think, once the vaccine is being sold, that the demand for the vaccine will be elastic or inelastic? Why?