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Midterm1_12_1_answers - Midterm 1 Economics 304K Principles...

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Midterm 1 Economics 304K: Principles of Microeconomics Prof. Meg Ledyard 12-1 pm 50 Min. Name _____________________ You have 50 min for the exam. There are a total of 100 points. You may NOT use calculators or other aids. You may leave any fractions un-simplified. Please show all of your work on the following pages. If you need more space, please use the back. Properly label all graphs. You should have 7 pages including this one. Please count them to be sure.
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1. Define the following: a. (2 points) Equilibrium b. (2 points) Demand c. (2 points) Efficiency 2. Consider the perfectly competitive market for peanut butter. Suppose that from data you observe that the elasticity of demand for peanut butter is 0.2 and the elasticity of supply for peanut butter is 4. a. (8 points) Draw a supply and demand diagram (graph) for the market for peanut butter. It does not have to be to scale, but it should be representative of the information given above. P-peanut butter S P* D Q-peanut butter Q*
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b. (8 points) Suppose that you know that the income elasticity of demand for peanut butter is -4. You observe that incomes have risen. Show this change in the market for peanut butter in a new diagram below. Explain why you changed the diagram in the way that you did. What happens to price and quantity?
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