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Unformatted text preview: 1. a. axes.) b. Elements of Microeconomics
Spring, 2000 (6 pts)Draw a production possibilities curve and state what it shows. (Be sure to label the (6 pts) Why is it shaped the way you have drawn it? (6 pts) For a given (arbitrary) set of prices, what combination of goods will be supplied?
Why? (6 pts) For the same set of prices as in part c above, what combination of goods will be
demanded? Explain how you know this. (9 pts) Draw an inward-bowed production possibilities curve. If this production possibilities
curve is correct, does proﬁt maximization occur where P = MC? Explain. 2. a. (5 pts)Draw an indifference curve and state what it depicts. b. (10 pts) For each of the following assertions, state whether it is True or False, and why. 1. An indifference curve cannot slope upward. ii. An indifference curve is bowed in (or at least not bowed out). iii. An indifference curve cannot touch either axis. iv. Two indifference curves (from the same consumer) cannot cross.
v. Two indifference curves (from different consumers) cannot cross. c. (5 pts) There are two goods, x1 and X; The price of XI declines.
i. What happens to the quantity of x1 demanded? Explain.
ii. What happens to the quantity of x2 demanded? Explain.
(For both subparts of part c, illustrate your answer with either indifference curves and budget constraints or demand curves.)
d. (8 pts) Income is $100 and the price of x1 is $1. The sellers of x; offer two different options.
Option 1: price = $2 ,
Option 2: price = $1 BUT you must pay a membership fee of $50.
Which option do you prefer? Explain. e. (6 pts) Would your answer to part d change if your income were $200? 3. a. (8 pts) Deﬁne economic efﬁciency and state why the deﬁnition is sensible. b. (8 pts) State the necessary condition for efﬁciency between two consumers. DO NOT
MENTION PRICES. Explain, c. (8 pts) State the necessary condition for economic efﬁciency between a consumer and the
production possibilities curve. Explain. d. (9 pts) Does the market economy we discussed in class deliver an economically efﬁcient
outcome i. Between any two consumers? ii. Between any consumer and the production possibilities curve?
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