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Unformatted text preview: 14.03 Exam 3 Fall 2000 DO NOT OPEN THIS EXAM UNTIL TIME IS ANNOUNCED! There are 95 points on this exam and you have 120 minutes to complete it. The points can be used as a guideline for how many minutes to spend on each problem (i.e, 1 ¼ minutes per point). If you are uncertain of the answer to a problem, move on to the next problem and return to the question at the end of the exam, time permitting. The questions are ordered as followed (with approximate times) : Three 10 point questions (12 minutes each) One 15 point question (20 minutes) One 20 point question (24 minutes) One 30 point question (40 minutes) THE EXAM WILL END PROMPTLY AT 3:30pm. WHEN TIME IS CALLED YOU MUST PUT DOWN YOUR PENCILS AND CLOSE YOUR EXAMS IMMEDIATELY. IN FAIRNESS TO ALL, IF YOU ARE SEEN WRITING AFTER TIME IS CALLED, WE WILL BE REQUIRED TO DOCK POINTS FROM YOUR EXAM. Question 1: 10 points After learning of the Tyler, Murnane, and Willet study demonstrating that the pure labor market signaling value of the GED is approximately $1,500, the GED Testing Service decides to lower the score required to pass the GED from 100 points to 50 points. Assume as in the Tyler, Murnane and Willet study that the GED acts only as a labor market signal, i.e., acquiring a GED does not affect an individual’s productivity at work. a. How would you expect this change (lowering the passing score) to affect the average wages of GED holders: increase, decrease, or remain the same AND WHY? [Feel free to include a figure.] b. How would you expect this change (lowering the passing score) to affect the high school dropout rate (i.e., the share of high school students who drop out before completing their degree): would it increase, decrease, or remain the same AND WHY? Question 2: (10 points) Microsoft Money is a personal finance program with zero marginal cost of production. There are two types of consumers: MBAs, whose total demand for Money is given by Q M ( P ) = 100 − P , and economics PhDs, whose total demand for Money is given by Q P ( P ) = 50 − 2 P . a) Microsoft cannot tell MBAs and PhDs apart, so it must charge a single price for Money. What is the profit-maximizing price? What are Microsoft’s profits? What is the consumer surplus for MBAs? What is the consumer surplus for PhDs? (Hint: consider that Microsoft can either serve both markets (by setting a price less than 25) or only the MBA market (by setting the price above 25).) b) A marketing wizard at Microsoft comes up with an idea for a new version of Money called Money for Economists. Money for Economists is exactly like Money except it does not allow annual incomes in excess of $100,000 to be inputted. This change does not affect the demand of economics PhDs, but it means that Money for Economists is completely useless to MBAs....
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