Key for Sample Exam 1

Key for Sample Exam 1 - (multiple choice 2 points The...

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(multiple choice, 2 points) The aggregation of linear individual demand curves gives a market demand curve that is linear as well under the following circumstances: a. Always. b. Never. c. When the individual demand curves are all the same. d. None of the above. (multiple choice, 2 points) For a straight line demand curve, a. demand is highly price elastic near the vertical intercept of the demand curve. b. demand is highly inelastic near the horizontal intercept. c. demand is unit elastic at the midpoint. d. All of the above. e. None of the above. (short answer, 6 points) It is well known that economists generally favor free trade over trade restrictions or no trade at all. What assurance is there that the complete integration of two formerly isolated markets will, in fact, make all parties better off? There can be no such assurance in general. It is possible in principle that everyone would benefit, or that some parties would gain at the same time that no one is made worse off. [That is what we will call a ‘Pareto improvement’ later on.] But, as was the case with the homework problem, it is altogether likely that the price of the traded product would go up to some buyers who are not otherwise compensated, and that the price of the traded product would fall for some sellers who are not otherwise compensated.
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(multiple choice, 2 points) For the case of perfect complements, a. the price consumption curve for a changing price of the good on the horizontal axis will be steeper than the income consumption curve. b. the price consumption curve for a changing price of the good on the vertical axis will be steeper than the income consumption curve. c. the price consumption curves coincide with the income consumption curve. d. None of the above. (multiple choice, 2 points) Michael is willing to trade off four 12 ounce cans of soda for one 12 ounce bottle of beer, always. Then a. his indifference curves are straight lines, and beer and soda are perfect substitutes. b. his indifference curves are straight lines, and beer and soda are imperfect substitutes. c. his indifference curves are all L shaped, with the kink points where he consumes four cans of soda for every bottle of beer. d. None of the above. (short answer, 6 points) Andrew has a fixed amount of money to spend on beer and soda. His optimum consumption point is indicated in the graph as point A. a. Draw an indifference curve for Joe that shows that this is, in fact, a consumer’s optimum for him. b. At this point, is he spending more money on beer or soda, and how do you know? c. His consumption choices of soda and beer are “independent” in the sense that his price consumption curve for changes in the price of beer shows no change in his consumption of soda, and his price consumption curve for changes in the price of soda shows no change in quantity of beer consumed. Draw these curves, passing through point A.
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