Econ 100A MT1 Ans

Econ 100A MT1 Ans - Department of Economics University of...

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Department of Economics Spring 2007 University of California Prof. Woroch Economics 100A : MIDTERM #1 SUGGESTED ANSWERS GENERAL INSTRUCTIONS : Write your name and your GSI’s name on the front cover of two blue books. Mark one blue book as #1 and the other #2. The exam has 3 parts: put Parts I and II in blue book #1, and Part III in #2. There is a total of 100 points with point assignments given in the instructions for each part. A point translates approximately into 1 minute of time. Make preliminary calculations on scratch paper, but be sure to put all of your answers in the bluebooks. I. DEFINITIONS : Choose 2 of the following 3 terms. For each one, (a) give a precise but concise (2 or 3 sentences) definition and (b) illustrate your definition using a diagram. Each is worth 7 points for a total of 14 points. 1. The “consumer price index (CPI) bias” When an income adjustment is made for price inflation, it may over compensate the individual or household because it ignores the substitution possibilities. For example, cost of living adjustments ensure that the household can purchase last year’s (average) basket at today’s prices. In general, consumers will substitute away from last year’s basket in response to a change in relative prices, thereby reaching a higher indifference curve. Reducing income from the level under the COLA so the consumer achieves its original utility but under the new prices, gives a measure of the CPI bias. 2. A consumer’s “income-consumption path” Plot the optimal consumption baskets of a consumer, each point of which solves the problem of maximizing utility subject to a budget constraint where prices of all goods and money income are given. The income-consumption curve is traced out by varying income while holding the prices of all goods as fixed. C 2 C 1 C , Units of clothing per year e 2 e 1 I 1 L 1 e * L * L 2 I 2 F , Units of food per year I 2 */ p 2 F I 1 / p 1 F I 1 / p 1 C I */ p 2 C F 2 F 1 I 2 / p 2 F I 2 / p 2 C
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Economics 100A Page 2 Midterm #1 Answers 3. A firm’s “experience curve” This curve plots a firm’s (minimum) average variable cost (AVC) of producing a product in a period against the cumulative quantity of that product that the firm had produced in the past. Assuming the firm experiences “learning by doing” in the production of the product, its experience curve will slope downward. Empirically experience curves have a slope of about -0.8.
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Econ 100A MT1 Ans - Department of Economics University of...

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