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Unformatted text preview: Econ 100
Exam 2
Fall 1998 SHOW YOUR WORK IF YOU WANT TO GET PARTIAL CREDIT 1) What is an income effect? (5 points) a) a line parallel to the new budget constraint that touches the old indifference curve b) the amount by which consumption changes when prices change, holding income
constant c) the amount by which consumption changes when income changes, holding prices
constant (1) a parallel shiﬁ in the budget constraint 2) The marginal rate of technical substitution is : (5 points) a) the amount by which output increases when an input is increased by 1 unit
b) the amount by which revenue increases when an input increases by 1 unit c) the ﬁrm’s ability to substitute one input for another while producing the same level of
output (1) the ﬁrm’s marginal physical product holding constant the level of output 3) Firm A’s production function is F(K,L)=(K+L)/K2. Does Firm A exhibit increasing,
constant, or decreasing returns to scale? (5 points) 4) a) Is good Y on the diagram below a normal good or an inferior good? (5 points) b) Based on the diagram above, draw the regular demand curve for Y and the
compensated demand curve for Y. Explain why the slope of the regular demand
curve differs from that of the compensated demand curve. More thorough answers
will receive more points (7 points) ’3 .‘5
5) Priscilla lives two periods. In the ﬁrst period her income is ﬁxed at $4,000. In the
second period, it is $2,200. She can borrow and lend at the market interest rate of 10 percent. Consumption goods cost $1 per unit this year and there is no inﬂation.
Priscilla’s utility ﬁmction is U(C1C2)= C12 C22. a) What is the future value of Priscilla’s income? (5 points) b) On the diagram below, draw Priscilla’s budget constraint, and clearly identify the point on the budget constraint such that Priscilla is fully spending her income in each
period. (4 points) C 7. C
. I
c) What is Priscilla’s marginal rate of substitution between consumption this year and
consumption next year, when C1=1 and C2=10? (5 points) d) Write down Priscilla’s budget constraint. (4 points) e) How much will Priscilla consume in period 1? In period 2? (5 points) f) Draw an indifference curve on the diagram above (in Part B) that would be consistent
with Priscilla’s preferences. (3 points) g) Now, the interest rate rises to 20%. Show what happens to Priscilla’s budget constraint on the diagram in Part B. Use an arrow to show how the budget constraint
changes (4 points) ' h) How will the change in the interest rate affect her saving/borrowing? Explain, using
income and substitution effects. (4 points) 5) Firm A’s production function is F (K, L) = (4K + 2L)“2 . The price of output is $100
per unit, the wage rate is $5 per laborer, and the price of K is $1. a) Find the marginal physical product of labor when K=1. (6 points) b) Find three combinations of L and K that are on the isoquant F=3. (6 points) 6) Cowville is considering the possibility of publishing a tourism brochure. The cost of
putting the brochure together is $1000. It is estimated that if the brochure is
circulated, it will bring in additional tourism that will generate $400 more dollars
annually, to local merchants. The additional revenues will be accrued starting in the
year after the brochure is published. After three years, the brochure will not bring in
any more tourists and the additional revenues will cease. The interest rate is 10%. Is it worthwhile for Cowville to invest in the brochure? (Hint: 1.12=l .2 and 1.13=1.3
and 1.14:1.5 and 1.15:1.61) (8 points) 7) The government levies a 30% wage tax on Cleopatra. It uses the money to ﬁnance a
parade. The parade’s value is just sufﬁcient to make her as well off as she was before the tax was levied. On a diagram, show the effect of the government tax and expenditure
package on Cleopatra’s labor supply. (9 points) C onsmf’lw‘on Ll L ei’sufe. 8) The demand equation for hamburgers is H= I/ 100 'Pf 2PH. Where Pf is the price of
ﬂies and PH is the price of hamburgers. Fries are a normal good. a) Are hamburgers and fries substitutes or complements? (5 points) b) Are hamburgers a Giffen good? (5 points) c) I=500, Pf=1 and PH=1. If the hamburger stand raises the price of hamburgers will its
revenues increase, decrease, or remain the same? (10 points) ...
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 Fall '10
 RANDHAL

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