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mt2011spring - PADP 6950 Fertig Name Midterm 1(10 points We...

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Unformatted text preview: PADP 6950 Fertig Name ______________________________________________________ Midterm 1. (10 points) We observe that the price of hamburgers in restaurants has gone up in Athens and want to figure out the cause. Here are 4 phenomena that we have identified that occurred at the same time. Draw the effect on the demand curve for each one and indicate which one(s) could have caused the rise in hamburger prices. a. The poor economy has caused a c. A report about the harms of red meat decline in the number of employed is released and gets a lot of attention people in Athens who are able to eat from the media. out at restaurants. +* ,* +* ,* Spring 2011 UGA -* !"#$%&'(&)* -* !"#$%&'(&)* b. There is a boom in the potato crop, which lowered the price of French fries (assume that fries and hamburgers are complements). +* ,* d. UGA increased enrollments of undergraduates who tend to like hamburgers. +* ,* -* -* !"#$%&'(&)* !"#$%&'(&)* 1 2. (10 points) The table below depicts the costs and revenues at various stages in the life of a new pharmaceutical drug. Assuming that the discount rate is 10% (per stage), calculate whether it is worthwhile for the firm to develop this drug? Stage 1: Research & Stage 2: Patent Stage 3: Patent Development Protection Expired Cost (millions) 150 10 10 Revenue (millions) 0 200 100 3. (10 points) Assume that the income elasticity of demand for meals purchased at fast food restaurants is -0.3, while the income elasticity of demand for meals purchased at other types of restaurants is 0.4. a. Due to the fall in the stock market and general economic downturn, incomes decrease by 10 percent. What will happen to the quantity of fast food meals purchased? What will happen to the quantity of meals purchased in other restaurants? b. In each case, circle the best answer: i. Fast food meals are inferior goods/normal goods. ii. Other restaurant meals are inferior goods/normal goods. 2 4. (20 points) Assume that the demand and supply curves for commodity X are described by the following graph. !" !!" !#" $" %" &" '" (" $" %" &(""%#""%(""$#""$(""!##""!#(""#" a. What is the equilibrium price and quantity? b. What quantity tax amount should be chosen to reduce consumption by 5 units? Show the effect of the tax on quantity and price (both the price paid by the consumer and the price received by the producer) in the diagram above. c. How did consumer and producer surplus change with the tax? Show using the graph above and a table. Make sure to highlight the deadweight loss. d. Show the area representing tax revenue in the diagram above. 3 5. (20 points) A person who buys a life insurance policy pays a certain amount per year and receives for his family a much larger payment in the event of his death. Explain why an economist would expect buyers of life insurance to have higher death rates than the average person using the ideas of moral hazard and adverse selection. 4 6. (30 points) Consider a consumer who purchases two goods, food and education. The consumer's income is $2000, the price of each unit of food is $2, and the price of each unit of education is $200. a. Draw the consumer's budget line for education (x-axis) and food (y-axis). b. Next, consider a government program that provides a voucher for 10 units of education to each consumer. Consumers can buy more education if they want more than 10. On a graph below, show the consumer's budget line with and without the voucher (label clearly). Draw on indifference curves and show how this is likely to change consumers' optimal choices. 5 c. What if, instead of providing a voucher, we make educational expenses tax- deductible? (For simplicity, assume a marginal tax rate of 50%, so assume that this policy effectively lowers the price of education to $100 per unit). Draw a graph showing the original budget line from part (a) and the new budget line when educational expenses are tax-deductible. Draw on indifference curves and show how this is likely to change consumers' optimal choices. d. If you want to increase the amount of education consumed among those who have a low valuation of education (as reflected by their indifference curve), which policy do you prefer (the policy described in part (b) or the policy described in part (b))? Assume that the programs' costs were the same. Explain your reasoning. 6 ...
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