# PastMidterm_Answers - University of California Irvine ECON...

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University of California, Irvine ECON 100A – Intermediate Economics I Fall 2008 Midterm Course Examination – SUGGESTED ANSWERS Exam 1 Name and ID#: __________________________________________________________ Rules: Closed notes and books, open minds. Non-programmable calculators are allowed. You have 80 minutes, use time wisely (applies beyond this exam). Make your own mistakes (i.e., do not copy neighbors’). There are five questions, each worth 20 percent of the total grade. 1. Some time ago, toll on the Golden Gate Bridge in San Francisco went up from \$4 to \$5. Before the toll increase took effect, some city council members feared that this hike will lead to lower toll revenues. Evaluate whether those council members were right if traffic fell by 5 percent following the toll hike. Explain, using the concept of demand elasticity. Elasticity of demand is %changeQ/%changeP = -.05/.25 = -.2, so demand is inelastic and raising the price will increase revenue. The council was wrong. Completely Correct: 20 Minor Mistakes: -2 No work shown: -6 No explanation: -6 Completely wrong: -12 Blank: 0

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2. Joe the Restaurant Owner has to decide whether to cook little or a lot of soup before the level of demand is known. The following table provides the profit the owner will receive, depending on how much soup is cooked and the level of demand: Low demand High demand Little soup 100 100 A lot of soup 20 200 a. If both high-demand and low-demand states are equally likely, what will be the choice of a risk-neutral owner (i.e., will he cook little or a lot of soup)?
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