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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(ym) ,
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 nonprofit 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.
Assume the elasticity of demand for electricity is 0.5 and the elasticity of supply is 1.0
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This note was uploaded on 04/01/2009 for the course ECON 101a taught by Professor Staff during the Fall '08 term at University of California, Berkeley.
 Fall '08
 Staff
 Utility

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