RevQuestionsMT2 - Economics 420K Spring 2010 Review...

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Economics 420K Spring 2010 Review Questions for Second Midterm Question 1 . Fred, Jane and Ashok are the only residents of Smallville. They all smoke cigarettes. Their respective inverse demand curves for cigarettes are: Fred: P = 50 – 0.5Q, for Q ≤ 100, P = 0 otherwise. Jane: P = 40 – 0.25Q, for Q ≤ 160, P = 0 otherwise. Ashok: P = 30 – 0.2Q, for Q ≤ 150, P = 0 otherwise. Carefully draw the market demand curve for cigarettes in Smallville. Question 2. Of the following production functions, which exhibit increasing, constant, or decreasing returns to scale? Explain why in each case. (i) F(K,L) = K 2 L (ii) F(K,L) = 10K + 5L (iii) F(K,L) = (KL) 0.5 Question 3. Toby consumes two goods, gasoline and apples, for which his preferences are represented by the utility function: U(q G ,q A ) = 150 + 3q G 0.4 q A 0.8 , where q G and q A respectively represent the quantities of gasoline and apples consumed per year. Let the prices of these goods (in dollars per unit) be denoted p G and p A . Toby’s initial income is $Y per year. (a)
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RevQuestionsMT2 - Economics 420K Spring 2010 Review...

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