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Unformatted text preview: 27 February 2008 Name
Midterm Exam Eco 146 Spring 2008 Professor Snyder Instructions: Use your usual good judgment. This is a 45 minute inclass closed book, closed notes exam. All work
shouid be your own. You need only a pencil or pen and blue book. Simple drawing aids are optional as
is a calculator for simple arithmetic (no use of stored programs). I will supply a calculator if you need
one. Snacks are allowed, but please be considerate. Do not leave your seat without permission. If you need a calculator, need to go to the bathroom, or
have a question about a problem, raise your hand and I will come to you. You have 45 minutes to complete this exam. There are two multiplesection questions. It is in your
best interest to answer ever section of every question. Each section is worth 2 points unless marked
otherwise. Write all answers in the blue book provided. Write your name on both the biue book and this test paper. When you are done place your test paper in your blue book, but stay in your seat. I will call time
remaining at frequent intervals. 1 ask that you leave when I do so, and not in between. This is to
minimize disruption for students who are still working. Good luck. 1) Kazakhstan has the following domestic demand for wheat: Qk = 1000 — 2p. Kazakhstan has
also exported a bit of wheat. The export market obeyed the foilowing demand curve:
Qe=700 — p. The supply curve for Kazakh wheat is given by: Q5 = 100 + 5p. a. What is the elasticity of domestic demand when p=300? What is the elasticity of
export demand when p=300? b. Draw a sketch showing Qk, Qe and what the total demand, Qd, for Kazakh wheat
must look like. (Hint: Qd = Qk + Qe, but there is never a negative quantity
demanded.) c. Write an expression for the total demand curve for Kazakh wheat. Sketch a supply
and demand drawing of the Kazakh wheat market. d. Find the equilibrium p and Q. At this equilibrium how much is consumed
domestically, how much is exported? e. The export market shifted due to crop failures elsewhere so that it is now described
by Qe = 2000 — p. This led the Kazakh government to institute an EXPORT tariff.
Expiain why. A sketch might help. 2) Risky Education: Mac has graduated from college. Congratulations Mac! She now has
a choice to make. She can take a nice steady job paying 30 and Work for two periods, or she
can go to grad school. if she goes to grad school and is successful she will make 105 in period
2, but nothing in period 1. She Would need to borrow her living expenses for period 1.
However, grad school is risky. She may go to grad school and not do so well. in that case she
will earn 60 in period 2, but nothing in period 1. Assume that her probability of success in
grad school is 1/3 and that her utility function is U(c1,c2) = min{c1, c2) where Cl is
consumption in period 1 and c2 is consumption in period 2. Also assume that she pays 50%
interest on the money she borrows for living expenses. 3. (1 point) If she does not go to grad school let us assume she just has c1=30 and
c2=30. No borrowing or spending. What is her utility? Yes, this question is easy. b. Draw a sketch for her budget constraints if she is or is not successful in grad school
and write dOWn a budget constraint for each possibility. c. Find her optimal c1 and c2 ifshe goes to grad school and is successful. Also find her
optimal c1 and c2 if she goes to grad school and is not successful. d. (1 point) Compute her monetary payoff in part a) and her expected monetary payoff
in part c). Which is bigger? e. But Mac is not trying to maximize her monetary payoff. Assume Mac is an expected
utility maximizer, and that when she thinks about the risk of grad school she is
governed by a second but related utility function U2=JU. Will she go to grad school?
That is, is the square root of your answer to part a) greater or smaller than the value
of the successingradschool lottery? (We could just say there is a single utility
function U = J(min(c1,c2)), and if you want to think of it that way, it will not really
change the problem.) 7 I f. (free skating) Mac has a 1/3 probability of success in grad school, but other people
have higher or lower odds of succeeding. The government thinks there is a social
beneﬁt to having more people go to grad school. is this a sensible position? What
could the government do to encourage more students to go on to grad school?
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This note was uploaded on 05/01/2008 for the course ECO 146 taught by Professor Snyder during the Spring '08 term at Lehigh University .
 Spring '08
 Snyder

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