ReviewFinal_spring04

# ReviewFinal_spring04 - Economics 313-1 Talia Bar Final...

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1 Economics 313-1 Cornell University Talia Bar Fall 2003 Final Examination This exam consists of three sections. Answer each section in a separate blue book and label each blue book clearly. The exam is worth 140 points. You will have 150 minutes (2.5 hours) to complete it. Allocate your time wisely between the sections. The exam is closed-book, but you may use a calculator. Good luck. Section I (50 points) Question 1 (30 points) Central High School (CHS) has \$60,000 to spend on computers (C) and a composite of other stuff (X). Prices of these two commodities are P C = P X = \$1. CHS has preferences for computers and other stuff that can be represented by U(C,X) = lnC+2lnX. In order to encourage A computer literacy in high schools, the State Education Commission is considering the following four plans: Plan A: Give a grant of \$10,000 to each high school in the state that the school could spend as it wishes. Plan B: For every \$1 that the school spends on computers, the state will give it 50 cents (i.e., a matching grant ). Plan C: Plan B, but the maximum amount of matching funds that the school could receive is \$10,000. (a) Find the bundle of computers and other stuff that maximizes CHS = s utility function if no plan were adopted. (b) Find the bundle that maximizes CHS = s utility function if Plan A were adopted. (c) Graphically show the income and substitution effect that results from the change proposed in Plan A. (d) Find the bundle that maximizes CHS = s utility function if Plan B were adopted.

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2 (e) Graphically show the income and substitution effect that results from the change proposed in Plan B. (f)
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ReviewFinal_spring04 - Economics 313-1 Talia Bar Final...

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