Practice_Test1 - Name: _ Student No: _ LANGARA COLLEGE...

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Name: _________________________________ Student No: _______________________ LANGARA COLLEGE Economics 2296, Section 1 Test 1 Time allowed: 80 minutes October 14, 2008 Answer the following eight questions in the exam booklet. Turn off all cell phones, pagers or anything else that might beep or that can be used to communicate with others. No books, notes, scrap paper or electronic devices allowed, with the exception of a simple, nonprogrammable, calculator. Explain your answers fully, show all work. Question 1 (6  marks) Consider a competitive market for which the quantities demanded and supplied (per year) at various  prices are given as follows: Q D  = 28 – 0.1P Q S  = 8 + 0.1P Where the price is in dollars and the quantity is in millions. a) What are the equilibrium price and quantity? b) Calculate the price elasticity of demand when the price is $100. c) Suppose the government regulates the price to be no higher than $80.  Calculate the resulting  surplus or shortage, if any. Question 2   (6  marks) Suppose Lucy enjoys licorice (X) and jelly beans (Y) according to the function U(X,Y) = min {X,Y}. Assume the price of licorice is $2 (per 100g), the price of jelly beans is $10 (per 100g), and her income is $60. How much licorice and jelly beans should Lucy purchase to maximize her utility. Show work. Question 3 (4  marks) Draw a set of indifference curves that represent the following individuals’ preferences for hamburgers and soft drinks. Indicate the direction in which the individual’s satisfaction (or utility) is increasing. a) Bill likes hamburgers, but neither likes nor dislikes soft drinks. b) Mary always gets twice as much satisfaction from an extra hamburger as she does from an extra soft drink. Question 4 (8  marks) Jerry consumes two goods: X and Y according to his utility function, U(X,Y) = XY 2 . Assume Jerry’s income is $60, the price of X is $5 and the price of Y is $8. a) Find Jerry’s utility maximizing combination of X and Y. b) Suppose the government proposes a tax-rebate scheme, in which the per-unit tax on good X is $3. Assume this per-unit tax increases the price of good X to $8 and that the amount of the rebate to Jerry is just the right amount so that he could continue consuming his original
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market basket if he wanted to. What would Jerry’s utility maximizing bundle be under this scheme? Question 5
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Practice_Test1 - Name: _ Student No: _ LANGARA COLLEGE...

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