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Unformatted text preview: NAME: K + GRADING mm; 2. Midterm Exam 6( OJ“ “(5)
Economics IOUB, Winter 2010
Professor Stevens lNSTRUCTIONS:
1. Write your name at the top of this page. Make sure that you have a total of 7 pagesmthis
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 paper 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: 1.
IIMI.
lImII, lI—III. TOTAL: Part 1. Multiple Choice. Circle the best answer for each of the following questions. (4 points
each) 1. An simultaneous increase in supply and decrease in demand will result in
a. An increase in price
b. An increase in quantity consumed _
A decrease in price . A decrease in quantity consumed
e. Both B and C 2. Two goods, X and Yiare complements in conSumption if
a. An increase in demand for X reduces the price of Y
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 ‘
d. 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 3. Joe has a utiiity function for apples and bananas given by U(A,B) = 4A + 6132. What is
his marginal rate of substitution of apples for bananas? 313
@ 1/(313)
C. 1213
d. 4
e. 4/12 4. 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 front consuming an additional unit of the good raises
utility by less than consumption of earlier units did
(:1. More of a good always makes a consumer better off
e. Indifference curves will be negatively sloped S. 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 . ~21)
® ~05
c. 20 percent (1. 5 percent
e. None of the above 6. .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 faliing
0. Given by the slope the productiou function
d. All of the above None of the above 7. 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
b. the effect of a change in income holding relative prices constant
c. the effect of a change in income holding preferences constant
the effect of a change in relative prices holding utiiity constant
e. the effect of a change in relative prices holding consumption of the other good
constant 8. If the “bandwagon” effect exists for a good, the market demand curve for the good wiii
be relative to the case Without the bandwagon effect
a. Steeper
' (9 More elastic
c. Less elastic
d. Shifted to the right
e. Shifted to the left 9. A Laspeyres Price Index holds constant a bundle of goods chosen in a base year and so
Wiil overstate the amount of income needed to compensate individuais for price
increases
b. Will understate the amount of income needed to compensate individuals for price
increases
0. Is equal to an ideal costof—living index
(51. Takes into account substitution effects of price changes 6. Is not useful if there is deﬂation 10. If an item is a normal good that means that
a. Increases in income will iead to decreased consumption of the good
The income effect will always be iarger than the substitution effect for that good
(9 Increases in income wili lead to increased consumption of the good
. The income effect will always be smaller than the substitution effect for that good
6. A and B Part ll. Short Answer. Answer each of the following questions in the space provided. Il—l._ Inhabitants of a tropicai island purchase fish in a competitive market. Recent
technological improvements have increased the supply of ﬁsh that are availabie. At the same
time, the islanders” preferences have changed so that they prefer more fish at every price.
(points 84—66) a. in the supply and demand diagram below (which illustrates the market equilibrium
before these recent changes), Show what these changes wili do to the equilibritun 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). 8795 Effect on
equilibrium
quantity of fish Effect on
equilibrium price
of ﬁsh 7 6% &\ [(3] b. The original demand curve for ﬁsh on the island is Qd = 19,500; 20?. The original
supply curve for ﬁsh on the island is Q5 m 18,500 i" SOP. Find the equilibrium price and quantity. @ LI—P+5 0. Suppose that the changes described above result in 200 additional ﬁsh being supplied at
every price, and 100 more ﬁsh being demanded at every price (starting from the supply
and demand curves given in part b). Find the new equiiibrium price and quantity. t‘iboowzoP 7—“ l87oo+8017 d. At a price for fish of $10, and prior to the changes described in part c, what is the
elasticity of demand for ﬁsh? ‘ 5 P 5 11—11. Consider a consumer who maximizes utility by deciding how much of goods X and Y to
consume X and Y are substitutes in consumption, and both are normal goods. The price of X is PK, and the price of Y is Py Income 13 equal to 1. (points 8 9 5)
a Show, below, the effect of a $3 decrease 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 ofboth X & Y. .wti b. Based on the infounation in part a, ﬁii 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. 6‘ Pf: Income Effect Substitution Effect t 9’6 W W6 c. Suppose that, at the same time as the price decrease for good Y, there is a $3 decrease 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 (23 sentences) explain your answer. II—III 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)=10(Lm)+ 8111(M) _ (points s34) a. Find the marginal products of L & M, and the average products of L 85 M. MPLE. sum AP“: lW _ 3 L.
? ._ M b. Find the Marginal Rate of Technical Substitution of labor for metal. MR. '5 .ﬂ. _ 5M.
MawSum: m: Lin 5 " 8‘]: 0. 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? me? he must it: Mﬂ'ﬁxb cw LINN/WU %% \i/ asL/h‘Mxl/I ...
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 Winter '09
 STEVENS

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