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222_Exam_1_Solutions - Boyle Midterm Exam#1 Please read...

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S S’ P D D’ Q ECON 222 Spring 2009 Professor Boyle Midterm Exam #1 Please read each question carefully. Keep in mind the point values for each problem and allocate your time accordingly. In order to receive full credit, you must show work for all your answers. You have 50 minutes to complete this test. Good luck! 1. (8 points) A study in Peru shows that toddlers who were breast-fed longer were more likely to be underweight or malnourished. Some medical researchers claim that this shows that longer breast-feeding leads to poor health outcomes. What is the problem with their conclusion? What is an alternative explanation for the study’s findings? These medical researchers are mistakenly assuming that correlation must imply causation. It is possible that mothers in the study who breast-fed longer were also poorer and continued breast feeding because of an inability to afford nutritious food. Poverty, and not breast feeding, may therefore be the cause of the malnourishment observed in toddlers in this study. 2. Suppose that the demand for outpatient visits in a particular community is described by and the equilibrium price is $40. a. (8 points) What is the price elasticity of demand at the equilibrium point? 1
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b. (8 points) More physicians move into the area, causing an increase in supply. Based on your answer in part (a), by how much (in percentage terms) will Q D change if the supply shock causes a 50% drop in P? Note that a 1% drop in P causes a .25% increase in Q D . Therefore, a 50% drop in P causes a 50*.25=12.5% increase in Q D . c. (8 points) How does the supplier-induced demand hypothesis predict that physicians will respond to the revenues lost from the supply shock in part (b)? Sketch a graph and explain very briefly (1 sentence).
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