Atkinson Professor Spring, 2004
Name FIRST HOUR EXAM ECN 4010
1. Below draw a straight line demand curve from a price of 10 to a quantity of 2. . a. Is this curve everywhere price inelastic, since it is so steep? b. Does slope help us determine whether a downward sloping straight line demand curve which touches both axes is elastic, unitary elastic, or inelastic? Explain.
c. Carefully label the elastic, unitary elastic, and inelastic portions. d. Now superimpose and label the total revenue curve. Make sure it is accurately drawn relative to the demand curve. e. If I lower price incrementally in the inelastic region, what happens to total revenue? .
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2. Draw a downward sloping demand and an upward sloping supply curve for a competitive market. Label them D and S. a. Label the equilibrium price as PC and the equilibrium quantity as QC . b. Now draw in a price ceiling and label it as Pceil . c. Indicate the amount that is sold in the market as Qs . d. Label any shortage or surplus. . e. Give an example of a price ceiling.
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3. Inferior good case that is not a Gien good. a. In Figure (a), Assume money income of $200, price of Y=$20, and price of X=$40. Graph the budget constraint. b. Now assume that the price of X decreases to $20. Draw the new budget constraint. c. Draw the necessary indierence curves to show an inferior good that is a not a Gien good. d. In Figure (a), label the pure income eect as I and pure substitution eect as S clearly on the x axis. . e. When we calculate the substitution eect, what is assumed to be constant? f. Do the substitution and income eects work together or in opposition in this case ? . g. In Figure (b), derive the corresponding demand curve. Be sure to drop down vertical lines from diagram (a) corresponding to each point of equilibrium.
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4. Gien good. a. Assume money income of $200, price of Y=$10, and price of X=$40. Graph the budget constraint. b. Now assume that the price of X decreases to $20. Draw the new budget constraint. c. Draw the necessary indierence curves to show an inferior good that is a Gien good. d. Label the pure income and pure substitution eects clearly on the x axis. e. In order to nd individuals (or rats) that consume a Gien good, what must be true . about the proportion of income that is spent on this good? f. What implication does the rarity of Gien goods have regarding the slope of the vast majority of demand curves? .
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5. Below I have drawn in a budget constraint and an indierence curve (U1 ) for money income and the quantity of X. Assume the consumer is initially at point F. a. At point F, does the consumer value good X more than the market does? Why? . b. Is the consumer in equilibrium at F? . c. If not, what does he want more of? d. I have drawn in U2 . Label the equilibrium position as point B, which is attained when the consumer trades o dollars for X shirts and ends up at point B. Drop down vertically from this point and label the point where you cross the X-axis as X . e. Label as point A the point where the consumer feels no worse or better o on U1 relative to point F, but now has X of good X. f. On the vertical axis indicate the vertical distance which represents the amount of income he is willing to trade o for X and feel indierent to point F. Label this distance WTP. g. On the vertical axis indicate the vertical distance which represents the amount of income he is required to spend by the market to obtain X and end up at point B. Label this distance RTP. h. On the vertical axis indicate the vertical distance which represents the consumer surp...