Sample+Midterm+questions - Sample Midterm questions 1....

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Sample Midterm questions 1. Assume that the market for gasoline is perfectly competitive. a. The marginal cost of gasoline production declines due to a technological development. At the same time, a change in consumer tastes for driving results in a decrease in demand for gasoline. Use a supply and demand graph to illustrate these changes. What happens to equilibrium price and quantity as a result of these (simultaneous) changes? b. Suppose that the demand curve for gasoline is perfectly inelastic. Does your answer to part a change? Explain your answer, and illustrate with a new graph. 2.Joe allocates his total income, I, between purchases of coffee (C) and tea (T). Coffee and tea are both normal goods and are substitutes in production. a. Show the total, income and substitution effects of an increase in the price of coffee on consumption of coffee and of tea. BE SURE to clearly indicate on a graph the effects on consumption of both goods. (Put coffee on the horizontal axis and tea on the vertical axis) b. After the price change in part a, the government decides to provide an income supplement that will allow a consumer to exactly afford his original consumption bundle (original combination of C & T). Will this policy leave the consumer with higher, lower, or the same utility as he had prior to the price change? Support your answer with a graph. 3 . Consider a utility-maximizing consumer who allocates total income, I, between housing (H) and food (F), with the prices of the two goods given by P H and P F . Assume that food and housing are substitutes for one another and that both are normal goods. (PUT FOOD ON THE VERTICAL AXIS AND HOUSING ON THE HORIZONTAL AXIS). a. On a graph show the income and substitution effects (on the quantities of both H and F consumed) generated by an increase in the price of housing. Label the intercepts of all budget constraints, and the consumption amounts on both the vertical and
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Sample+Midterm+questions - Sample Midterm questions 1....

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