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practicemidterm - Economics 101A Fall 2008 Practice...

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. Economics 101A – Fall 2008 Practice Midterm #1 (based on Fall 2007 midterm) THERE ARE 3 QUESTIONS. ANSWER ALL 3. THERE IS SOME CHOICE IN #3. Spend no more than 25 minutes on each question. 1. A person has utility function: U(x,y) = " log(x) + (1- " ) log(y-m) , where x=other goods, y=food, and m=minimum food consumption. a) Suppose prices are p x , p y , and income is I, with I>p y m (i.e., she can afford to buy the minimum food bundle). Derive her demand function for good x. b) Using Slutsky’s equation and the demand function you derived in (a) find the substitution effect of a rise in the price of x on demand for x (i.e, the derivative of the compensated demand for good x with respect to p x ). 2. The California electricity market has local suppliers and demanders, but no imports of electricity. Currently, the market is in equilibrium at a price of 20 cents per kwh, and quantity=100 million kwh’s per day. A non-profit consortium believes it can build high capacity lines to import electricity and sell it 15 cents per kwh, the price in the rest of the US.
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