Econ 101, Midterm
Solutions
Alan C. Marco
Fall 2005
1
2
3
4
5
6
7
8
9
10
11
12.1
12.2
12.3 Total
m
i
n
00000000000000
mean
2.5
1.8
2.0
2.4
1.9
2.3
2.5
1.6
1.7
1.9
2.2
2.1
3.5
1
29.3
m
e
d
i
a
n
32222222222250
2
9
m
a
x
56555554555555
worst case scenario cutoffs
a/b+
40
b/c+
24
c/d+
18
d+/f
10
Short Answer [30]
[Hint: you should mention elasticity at least once in this section, besides the obvious.]
1.
JeanClaude prefers wine to beer, and Katrin prefers beer to wine. In the graph below, identify which indi
f
er
ence curve belongs to JeanClaude, and which belongs to Katrin. Explain your choice.
Beer
Wine
IC
1
2
•
Katrin =
2
.
Jean Claude =
1
.
•
For both ICs, the slope represents the quantity of wine traded for a quantity of beer, e.g.,
∆
W
∆
B
.
This slope
is also the marginal rate of substitution, i.e.,
MRS
=
MU
B
W
.
•
Since Katrin’s curve is steep,
B
>MU
W
. Since Jean Claude’s curve is
f
at,
W
B
.
•
You needed to discuss
and/or slope to get full credit.
•
The IC curves are not elastic or inelastic. Where did this come from?
2.
Measured at any given price, which curve is more elastic? [Extra credit (*) for answering the question at any
given quantity also.]
1
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P
D
1
D
2
∆
Q
2
∆
Q
1
∆
P
Price
•
Consider a change in price for both demand curves, given by
∆
P.
The starting
P
and
∆
P
are the same
in both cases, so
%
∆
P
is the same.
•
D
2
will have a change of quantity demanded:
∆
Q
2
.D
1
will have have a change of
∆
Q
1
.
•
We can say that
D
2
is more elastic because:
(a)
∆
Q
2
>
∆
Q
1
(b)
∆
Q
2
applies to a smaller starting quantity, thus
%
∆
Q
2
>
%
∆
Q
1
.
(c)
%
∆
P
is the same for both curves.
(d) So,
%
∆
Q
2
%
∆
P
>
%
∆
Q
1
%
∆
P
.
•
You could not just assume that
f
atter slope translated to lower elasticity, because this is not always true.
It’s
percentage
change that matters.
Quantity
•
Quantity is harder because given a quantity change, it appears that the
%
∆
P
is ambiguous. However,
that isn’t actually true.
•
Consider a demand curve
Q
=
A
−
bP
(so that
A
is the intercept on the
Q
axis and
b
represents
∆
Q
∆
P
)
.
•
This could be rewritten
P
=
A
−
Q
b
.
•
Elasticity (measured at
Q
)is
−
∆
Q
∆
P
P
Q
=
b
A
−
Q
b
Q
=
A
−
Q
Q
.
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 Spring '08
 Staff
 Microeconomics, Supply And Demand, Oil prices, rent control, Katrin

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