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Unformatted text preview: NAME: Midterm Exam
Economics 10043, Winter 2018
Professor Stevens INSTRUCTIONS:
1. Write your name at the top of this page. Make sme that you have a total of 7 pages—this
cover page plus six pages of exam questions. 2. Write all answers directly on the exam pages. Use the back of the pages for additional papei~ if
needed. Show your work AND clearly indicate your ﬁnal answer. 3. You have 1 hour and 15 minutes to complete this exam. It is worth a total of 100 points. 4. You may NOT use a calculator, or any notes or other materials. Score: I.
1M.
1111. liIII. TOTAL: Part1. Multiple Choice. Circle the best answer for each of the following questions. (4 points
each) 1. Joe has a utility function for apples and bananas given by U(A,B) : 4A + 6132. What is
his marginal rate of substitution of apples for bananas? 2. The assumption of diminishing marginal utility means that
a. Indifference curves will be convex to the origin
b. Consuming more of a good sometimes does not increase utility
'. The additional satisfaction from consuming an additional unit of the good raises
utility by less than consurnption of earlier units did
(1. More of a good always makes a consumer better off
e. Indifference curves will be negatively sloped 3. An simultaneous increase in supply and decrease in demand will result in
a. An increase in price
An increase in quantity consumed
A decrease in price . A decrease in quantity consumed
e. Both B and C 4. Two goods, X and Y, are complements in consumption if
. An increase in demand for X reduces the price of Y
a An increase in the price for X reduces the quantity demanded of Y
c. An increase in demand for X increased the price of Y
(1. An increase in the price for X increases the quantity demanded of Y
e. An increase in the price of X reduces the price of .Y ‘ 5. If the “bandwagon” effect exists for a good, the market demand curve for the good will
be . relative to the case without the bandwagon effect
Steeper
Q. More elastic
c. Less elastic
d. Shifted to the right
e. Shifted to the left 6. The price of Girl Scout Cookies increased by 14% and the quantity demanded fell by 7%.
The price elasticity of demand for girl scout cookies is s . ‘21)
c. 20 percent d. 5 percent
e. None of the above 7. The average product curve is
a. Above the marginal product curve when the average is rising
b. Below the marginal product curve when the average is falling
c. Given by the slope the production function . All of the above
@ None of the above
8. The substitution effect on consumption from a change in the price of a good is defined as
a. the effect of a change in preferences holding utility constant A
b. the effect of a change in income holding relative prices constant
the effect of a change in income holding preferences constant
the effect of a change in relative prices holding utility constant the effect of a change in relative prices holding consumption of the other good
constant 9. A _ a peyres Price Index holds constant a bundle of goods chosen in a base year and so
Will overstate the amount of income needed to compensate individuals for price increases
b. Will understate the amount of income needed to compensate individuals for price increases
0. Is equal to an ideal cost—of~1iving index d. Takes into account substitution effects of price changes
e. Is not useful if there is deﬂation 10. If an item is a normal good that means that
a. Increases in income will lead to decreased consumption of the good
b. The income effect will always be larger than the substitution effect for that good
Increases in income will lead to increased consumption of the good
. The income effect will always be smaller than the substitution effect for that good
e. A and B Part II. Short Answer. Answer each of the following questions in the space provided. ILL Inhabitants of a tropical island purchase ﬁsh in a competitive market. Recent
technological improvements have increased the supply of ﬁsh that are available. At the same
time, the islanders’ preferences have changed so that they prefer fewer ﬁsh at any price.
(points 84443—5) a. In the supply and demand diagram below (which illustrates the market equilibrium
before these recent changes), show what these changes will do to the equilibrium price
and quantity of fish. In the summary box, indicate what happens to the price and
quantity, based only on the information given above (not using the equations in part b). Effect on Effect on
equilibrium price equilibrium
of fish uanti of fish it 65‘} b. The original demand curve for ﬁsh on the island is Qd m 19,500— 101’. The original
supply curve for fish on the island is Q5 m 18,500 + 1901’. Find the equilibrium price and
quantity. 1 «600 ~ to? "3» ($600 was!) 0. Suppose that the changes described above result in 200 additional ﬁsh being supplied at
every price, and 200 fewer ﬁsh being demanded at every price (starting from the supply
and demand curves given in part b). Find the new equilibrium price and quantity. d. At a price for ﬁsh of $20, and prior to the changes described in part c, what is the
elasticity of demand for ﬁsh? 5 57%[Wﬁl s, 20
w “'"' /O W). II—II. Consider a consumer Who maximizes utility by deciding how much of goods X and Y to
consume. X and Y are complements in consumption, and both are normal goods. The price of X is PX, and the price of Y is Py. Income is equal to 1. (points 8—96)
a. Show, below, the effect of a $2 increase in the price of Y on consumption of both goods.
Be certain to labor all budget constraint intercepts and Show the original and new amounts of both X & Y. b. Based on the information in part a, ﬁll out the following chart, indicating the direction
(increase,_ decrease, or uncertain) of the income, substitution, and total effects of the price
change on consumption of goods X and Y. 0. Suppose that, at the same time as the price increase for good Y, there is a $2 increase in
the price of good X. What is the income effect on consumption of the goods from these
combined price changes (does consumption of each go up/down/or is uncertain)? What
is the substitution effect? (Brieﬂy (2»3 sentences) explain your answer. NCOME EFFQLT; Ecru P2 @4‘, 50 )W/NU/ gt/tBiT EFFET’ :7 Dnrlécﬂoru DEWEMPOS on)
weaves: PM, é “a, View 11—111 The production of gaskets is achieved by combining two inputs, labor (L) and metal (M).
The production function for gaskets is given by ‘ F(L,K) 2 5(L1’2)+ 12 ln(M) ' (points see) a. Find the marginal products of L & M, and the average products of L & M. Ma: at“ Ae=(5u”+lwm)ll~
MPM ; {EL/ﬂ . APB/k: [51)” + gnaw/M b. Find the Marginal Rate of Technical Substitution of labor for metallA 5 M
MP 5 “’2 ,. ’ J : —~ I”
MRTS: 7275:; 2..L tL/M .— %uH—T2'_ 71%de c. Will isoquants based on this production function be convex (have a slope that decreases
in absolute value as you move southeast along an isoquant)? How do you know? wit—rt. BE: CaMkEl‘ it: Mexs Kl; a0 UM Put/E . W n {me fine slope 09W
HRTS is {5“ ‘5 pstmué AS we 3 memes. If FLOW?“ .e‘l , Q
\ i) we ALOMG THE t50l§WWTI 'TW'LL’E)
M0 @odex END OF EXAM. ...
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 Winter '09
 STEVENS

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