midf05s - Econ 101, Midterm Solutions 1 0 2.5 3 5 2 0 1.8 2...

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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. Jean-Claude prefers wine to beer, and Katrin prefers beer to wine. In the graph below, identify which indi f er- ence curve belongs to Jean-Claude, 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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Q 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 re-written 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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midf05s - Econ 101, Midterm Solutions 1 0 2.5 3 5 2 0 1.8 2...

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