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1998 midterm 1

1998 midterm 1 - Elements of Microeconomics Midteml Exam...

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Unformatted text preview: Elements of Microeconomics Midteml Exam Spring 1998 1. a. Draw a production possibilities curve. Label the axes, state what the curve depicts, and state why it is shaped as you have drawn it. b. The prices of the two goods are p1 and p2. (These prices have been selected at random.) What combination of the two goods will be supplied, and why? c. What combination of the two goods will be demanded, and why? d. Show brieﬂy what will happen to prices, and to quantities supplied and demanded, from the starting point you described in parts b and c, and explain why. [You do not need to go through all possible detail here, but be sure to show enough so that we can see whether you know what is going on] 6. Now suppose that the production possibilities curve is not as you (should have) drawn it in part a, but is a straight line. i. What can you say about the equilibrium price ratio? ii. At this price ratio, what can you say about the quantities demanded? (Can you say enough to be sure that the price ratio is an equilibrium?) a. Describe the meaning of an indifference curve. b. The following is a list of “properties of indifference curves.” Some are correct and some are not. For each “property” state whether it is a correct property or not, and brieﬂy state why or why not. i. They cannot slope upward. ii. They cannot touch the axes. iii. They must be bowed in (or at least not bowed out). iv. They cannot cross. V. They must be parallel. c. Derive two points on a consumer’s demand curve and describe what you have done. d. If the price of one good declines, what happens to the quantity demanded of the other good? Explain. 3. a. Deﬁne economic efﬁciency (Pareto optimality). Explain why this deﬁnition makes sense as a criterion for judging an economy. b. In Figure l, the graph at the left shows consumer A’s endowment of x1 and x2; the graph on the right shows consumer B’s endowment of the same goods. Is the allocation of goods between the two consumers efﬁcient? Explain thoroughly. 0. Now answer the question of part b but using the pair of graphs labeled Figure 2. d. Now assume that the consumers of Figure 2 live in the same market economy. Depict the combination of endowments that they will end up with (after they do their shopping). i. Will they end up with the endowments shown in Part c? Explain. ii. Will the endowments they end up with be efﬁcient? Explain. ...
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