Fall 2005 Midterm Exam 1

Fall 2005 Midterm Exam 1 - ECONOMICS 21 1 FIRST MIDTERM...

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Unformatted text preview: ECONOMICS 21 1 FIRST MIDTERM EXAMINATION Fall 2005 (2 hours, 100 points) Circle the name of your instructor: Clarke Fotev Gilbert Osman Tung Wu NAME: ( 5 ETQAMC ’4 .4 l I. f . 1-.l ’ . 40 i c- ’ r ' ' l ' a I / .A . '11. ¢ - 1 ’ -' h "1 b” . . V (21 points) PART 1: MULTIPLE CHOICE (Circle the correct answer) (3 points) If the demand curve for a good always has unitary price elasticity, what does this imply about consumer behavior? monsumers do not react to a price change. onsumers will spend a constant total amount on the good. M Consumers are irrational. ((1) Consumers do not obey the Law of Demand. (3 points) As beef prices change, the change of pork demand curve can be described as the movement k3 ,,,,,, :> @f a shift in the pork demand curve. (b) of the equilibrium price. along the pork demand curve. from a necessity to a luxury good. 3 (3 points) For a given positively sloped supply curve, the price increase to consumers resulting from a specific tax imposed on sellers will be (a) greater the more price elastic of demand is. reater the less price elastic of demand is. (0) equal to the entire tax when demand is perfectly elastic. ((1) equal to half of the tax whenever demand is unit elastic. 4) / /('3 points) The figure below shows Bobby’s indifference map for juice and snacks. \// Also shown are three budget lines resulting from different prices for snacks. This information could be used to determine (a) the slope of Bobby’s demand curve for juice. (b) the amount by which Bobby’s demand curve for juice shifts when his income rises. @iw amount by which Bobby’s demand curve for juice shifts when the price of snacks rises. (d) All of the above. Juice Snacks 5) (3 points) Suppose a graph is drawn to show a consumer’s preferences for football tickets and basketball tickets. The quantity of football tickets is measured on the horizontal axis. If the price—consumption curve is horizontal over a specific range of prices when the price of football tickets changes, then over this price range: /A{footb 11 tickets are an inferior good. (b) e demand for football tickets is perfectly elast . r (d) the demand curve for football tickets will be horizon e demand for football tickets is unit elastic. X (3 points) When John’s income was low, he could not afford to dine out and would respond to a pay raise by purchasing more frozen dinners. Now that his income is high, a pay raise causes him to dine out more often and buy fewer frozen dinners. Which of the following best represents John’s Engel curve for frozen dinners? ‘ -=-—"“ 7 irst positively sloped, then backward-bending. / Ways positively sloped. / ‘ / (c) Al ays negatively—sloped. (d) First backward-bending, then positively sloped. §< (3 points) One reason why the quantity demanded of a normal good tends to fall as its price rises is M @ople feel poorer and cut down on their use of that good. 4M (b) demand has to fall to restore equilibrium after a price rise. ,.I. I: e increase in price shifts the demand curve upwards. ‘ i‘ he increase in price shifts the supply curve upwards. (39 points) PART 2: SHORT PROBLEMS 8) (6 points) Each of the following three questions refers to the market for a specific commodity. In the space below draw a well labeled supply and demand graph to show the effect of stated events (observations) on the market in question. Indicate the change in equilibrium price and quantity by circling the correct answer. (a) (2 points) In the market for cigarettes: Floods destroys major share of the tobacco crops. Also, recent court cases revealed the extent to which major tobacco companies misinformed the public about the harmful effects of smoking cigarettes. 4/, 39 Effect on equilibrium price: W Decreases, The same, WW 0 (b) (2 points) In market for oranges: Arfiarly freeze hits orange groves and at the same time according to a study, the average income level of consumers decrease. Assuming oranges are a normal good, what is the effect of these two observations? i’ Effect on equilibrium price: Increases, Decreases, The same, Effect on equili ium Quantity: ’ j, The same, Ambiguous (c) (2 points) In the market for beef: The price of feed grain for cattle and the price of chicken increase. Assuming that the cross price elasticity of demand between chicken and beef is positive, what is the likely effect of the e obsepvZ ‘ ? 9) (12 points) Assume the market demand for wheat may be written as Q=45 —2p+0.3Y+ lpb where Y refers to income and pb refers to the price of barley. Assuming that wheat and barley both sell for $1, and income is $20, calculate the price elasticity, cross price elasticity and income elasticity for wheat at the price of $1. (Graph is optional.) 5 Q ‘5’ <23 2—; 62 7": 5:.3(§) Vb 10) (9 points) The government seeks to prevent the voluntary exchange of illegal drugs. (a) (3 points) How will the economic effects differ if the government targets the sellers instead of the bgers? Use two basic Supply-Demand graphs to explain. ’70 pkg X D ) (3 points) In practice, which side of the market does the government usually target? Why? _ 5% 9mm. pacer/m my“ My 7‘0 W511) // W/r/ M {000 frag? VJ.” QL/C( M 0* 0 ‘m "40% what/7 1 (c) (3 points) List one possible behav1ora1 consequence of these law enforcement activities which target on (i) sellers (ii) buyers. . ice 0 l £900? a?) ’0 026a) sax/a5) @953 ,4/ (Mg/7| fl /(r) pjkqooe’. 71am rm (7 OHM/‘18 5/0 04/05 5/.)24‘5, ‘ a (96% Mt (a?le M? [We we mm W preach a) 4d «at ‘ E 30%, R 11) (12 points) Consider the figure below. Begin with the consumer in equilibrium with an income of $300 facing the prices PX = $4 and PY = $10. 30 22.5 O 45 55 6O 75 1,,4 X [/(4) (1 point) How much X is consumed in equilibrium? é’i (/5 ( (1 point) Let the price of X fall Kim, income and the price of y remaining constant. What is the new equilibrium quantity of X? 5% 55/ 9 3 points) How much income must be taken from the consumer to leave him just as $99 ’ ello as before? (d) (4 points) In terms of good X, what is (i) the income effect, and (ii)substitution effect? M > %&3 points) Is good X a normal good, @ or a Giffen good? Why? in», W mm + WWW m Will/WV J (40 points) PART 3: LONG PROBLEMS l2) (14 points) The table provides data on income and demand for goods X and Y: (a) (12 points) Calculate the follow months. Elasticities Y changes in Py Price elasticity for X Income elasticity for Cross price elasticity 5Q tale? of X with respect to R elativ Months Feb 500 27 9 9 40 Mar 1 500 27 8 14 36 May 900 33 7 J 19 32 ifiLcelasticities, selecting appropriate pairs of 13) (12 points) Suppose the market for milk can be expressed as Demand: QD = 100 — 2p 5 3,. Supply: QS = 3p 9g; (a) (8 points) If government imposes a $5 specific tax to be collected from sellers, what is the price consumers will pay? Q6; 5% > C m“ 2 ,0 (b) (4 points) How much tax revenue is collected? 1; fraction is paid by sellers? 5,): {6' so (Graph is optional) 50 l4) (14 points) You are a die-hard ice cream lover and you work to earn money so that you can buy ice-cream, which is the only good you consume. As a hard—working Rice student, you value your leisure time as well. You have 16 hours to allocate each day between work and leisure. Currently you work as a baby-sitter for $5/hr and work 8 hours a day. The price of ice cream is $1. (a) (2 points) On the graph below, draw an indifference curve and budget constraint to be consistent with your current choice. Label the optimal choice El. (b) (2 points) Realizing that baby—sitting is a tedious job; your employer decides to raise your salary to $10/hour. Suppose your labor supply curve is upward- sloping. On the same graph, draw your new budget constraint, indifference curve, and this new equilibrium. Mark this new equilib iurn as E2. (0) (5 points) Indicate the income effect and substitut' n effect clearly. (including inferior good to you? size and direction) In this case, is leisure ., consumption 160- : a : : I : _ I I I I I l I I I i I I ‘ I I l I l I 140 L— ' ' ‘ ' .' ' } . : ‘: I : I - I : : l i : fi—___I_____I______._____ 120 _ T : E l : : I l t i I E E 100 _P l — ‘ ' : T “ I ‘ i i I : i l I i so ., ——l—w~——-{»-w wg —» ~ * ~ «r— 1 i E : : 60 ' ——r—' ' ' ' 1—— E I I l I 40 *———‘—: i 2 fit ‘ 60 i I I I (\ : : : . 20 r z —» T' l l I I I i l l Oll—III—i—III i—-+l——+—-iilt I: I—t—I—4—4 .\ Leisure 0 2 4 6 8 10 12 14 155% K3 @ (d) (5 points) Now, suppose your Econ 211 instructor knows your craving for ice— cream and offers you a Ben & Jerry’s coupon. Since you only buy ice—cream this is like cash to you. However, the face value of the coupon will be the difference between what you earn and $40. In other words, if your wage from baby—sitting is $30, your instructor will give you a $10 coupon. On the graph below, ShOW how this offer will change your budget constraint. Will you take your instructor’s off or keep your $5/ hr baby—sitting job, given consumption 160% 140 l 1 i l _-_-r--_-7 * a I I l ,rn _ I I I Leisure 6 8 10 12 14 16 (Extra graphs for question 14 if needed.) consumption 160 140 ILIIIJIII_II,II’II.III1III|IIII Leisure 16 14 12 1O consumption IIIII' IIIIJ‘IIII Leisure P1+~LI 1—4— : 16 14 12 1O 11 ...
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Fall 2005 Midterm Exam 1 - ECONOMICS 21 1 FIRST MIDTERM...

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