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Unformatted text preview: Economics 811 , Dr. Walter E. Williams
Fall 2006 MIDTERM EXAMINATION INSTRUCTIONS: Answer ALL questions in Part I. Select two ques—
tions from Part II. Each question has equal weight. You may
select one additional question as EXTRA CREDIT (10 points) and it must be labeled as such. Your answers are to appear sequentially
in one bluebook. Make your answers neat, concise and to the point; superfluous, irrelevant verbiage will be downgraded.
PART I 1. Imagine a community of individuals with different tastes and
different productive opportunities in goods X and Y. a. Graphically show the representative individual’s productive
(Qthand consumptive (C*) optima in the absence of trade. b. Suppose the idea of market exchange emerges and that a
market price exists for goods X and Y. Explain analytically (on
the same graph) the new productive (Q**) and consumptive (C**)
optima. c. Explain how your illustration demonstrates the existence of gains from specialization and exchange. d. After the idea of market exchange emerges, is it possible for
anyone to be worse off? 2. Assuming two normal goods Y and X, (a) demonstrate the substi—
tution and income effects of a fall in the price of X; (b) derive
the ordinary demand curve fOr commodity X; (c) on another graph
derive a "pure" demand curve holding real income constant both in
the Hicks and Slutsky senses; (d) for a normal good, which of the
latter two curves is more elastic? Why? Would your answer differ
in the case of a rise in the price of X? What might be an empiri—
cal usage of an income—compensated demand curve? Explain. 3. Give short comments (25 words or less) to the following, first
state whether the statement is True, False or Uncertain: a. The income effect of a price change is usually small compared to the substitution effect. b. Convex indifference curves are guaranteed by the law of diminishing marginal rate of substitution.
c. Unemployment means there are not enough jobs to go around.
d. Demand curves tend to be more elastic in the long run than in the short run. Part II 4. Mike's utility function is U=5XY and his income is $50, m,= 5,
and mi: 10. a. Find Mike's demand curve for X. b. Show the effect of a 50% sales tax on the initial price of X.
0. Suppose that an income tax were placed on Mike's income such
that it raised the same revenue as the sales tax in (b) above,
how much X and Y would be purchased? How do you theoretically
account for such a change in purchases? d. Which tax, sales or income, would Mike prefer? Explain. Underline each of your numerical answers. 5. In “Toward a Theory of Property Rights,” Harold Demsetz pres-
ents the argument that in a world of zero transaction costs that
“The output mix that results when the exchange of property rights
is allowed is efficient and the mix is independent of who is
assigned ownership." Briefly explain his argument and state the
effects of non—zero transactions cost and state what is affected by
property rights assignment. Conclude your answer with a real-world
example of a problem that would be solved by property right assign-
ment or acknOwledgment of those assignments. 6. What economic forces explain each of the following phenomena?
Give a logically complete but brief answers in each case. (a) The tendency for married couples with small children to spend
relatively more on entertainment when they go out than do married
couples without small children. (b) The tendency for non-poor persons to make money or in—kind
transfers to poor persons. State the assumptions that underlie the
choice to make money transfers versus in—kind transfers and which
is more efficient? (c) The lessened tendency for physical attributes such as race and
sex to be used as criteria for choice for higher level positions of
employment (managers, executives, etc.) than for lower level
positions of employment (janitors, dishwashers, etc.). (d) The agricultural yield per acre being higher in Japan than
United States. ...
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- Spring '08