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# midf06s - Econ 101 Midterm Fall 2006 Performance Cutos are...

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Econ 101, Midterm Fall 2006 Alan C. Marco November 1, 2006 Performance. Cutofs are approximate. Question 1 2 3 4 5 6 7 8.1 8.2 8.3 8.4 8.5 Total Min 0 2 0 0 1 1 0 0 0 0 0 0 Mean 2.17 3.55 1.41 2.31 4.34 2.17 2.03 3.97 3.97 4.31 3.83 3.28 37.3 Median 2 3 0 2 5 2 2 5 5 5 5 5 40 Mode 0 3 0 3 5 2 2 5 5 5 5 5 44 Max 5 5 5 5 5 5 4 5 5 5 5 5 Cutoffs A/B 43 B/C 35 C/D 23 Short Answer [20] 1. Assume that two goods, x and y , are (imperfect) substitutes. Using indiFerence curves and budget lines, show how a decrease in the price of x aFects the quantities consumed of x and y . Here, some people got ±ancy and talked about income and substitution efects. That’s ok as long as you were precise in how you described them. In general, I didn’t require any discussion o± income efects, since we didn’t really discuss them in class. I mentioned that during those lectures. Key things: De²nition o± a substitute. You should show the price change clearly and the quantity changes clearly. The quantity o± y should decrease and the quantity o± x should increase a±ter the price decrease in x . I± the quantity o± y didn’t decrease, then you need to speci²cally mention income efects and that the income efect was larger than the substitution efect. ICs should not slope upward! 2. Price elasticity of demand will be higher if more substitutes are available, and it will also be higher the longer the time period is. Explain how these two eFects are related, and give an example. Substitutes allows the consumer to more easily get that need met ±rom other products. Thus, demand will be more elastic. Over time, more substitutes are available ±or two reasons: Most importantly, it may be di³cult to switch consumption in the short run i± there are ²xed costs o± switching. For instance, i± gasoline increases in price, consumers can switch to lower grade gas, or public transit, or a more e³cient car, or they can move. Many o± these changes take time and/or are costly. Also, there’s “supply substitution” in that over time more products may become available (or more cost efective to produce). In our gas example, this would take the ±orm o± ±uel cells, new hybrids, new mass transit, etc. However, this is not the reason ±or a diference between short run and long run

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## This note was uploaded on 04/26/2010 for the course ECON 101 taught by Professor Staff during the Spring '08 term at Vassar.

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midf06s - Econ 101 Midterm Fall 2006 Performance Cutos are...

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