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Name ___________________________________ Section __________________________________ ECO 3101 Midterm Exam 1, Spring 2008 Professor Sarah Hamersma...

I need an explanation for number 2 i had the answer but i don't understand how go to get there
Name ___________________________________ Section __________________________________ ECO 3101 Midterm Exam 1, Spring 2008 Professor Sarah Hamersma Instructions: You have 120 minutes to complete this exam, which is worth 100 points (20% of your grade). The first questions are multiple choice - please choose the best answer and circle it clearly. The next questions are quantitative problems - please show your work clearly so that your answers can be assessed for partial credit. The last section includes short answer and essay questions, so be careful to write legibly. Thank you! Multiple Choice (5 questions @ 4 points each): 1. The slope of an indifference curve at some particular point (X,Y) a. Is equal to the slope of the straight line that would be tangent to the function at that point b. Is equal to the slope of the straight line connecting the origin and the point c. Depends on the budget constraint d. Is constant for the entire curve 2. If the marginal utility of X is 3 Y and the marginal utility of Y is X , what is the marginal rate of substitution? a. MRS = X / 3 Y b. MRS = 3 Y * X c. MRS = 3 Y / X d. MRS = X + 3 Y 3. We discussed an article in class in which the authors examined the effects of subsidizing basic food (rice or wheat) in rural China. What did they find? a. Subsidizing rice/wheat resulted in higher consumption of rice/wheat, confirming the existence of Giffen’s paradox b. Subsidizing rice/wheat resulted in lower consumption of rice/wheat, confirming the existence of Giffen’s paradox c. Subsidizing rice/wheat resulted in higher consumption of rice/wheat, failing to confirm the existence of Giffen’s paradox d. Subsidizing rice/wheat resulted in lower consumption of rice/wheat, failing to confirm the existence of Giffen’s paradox 1
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4. The “Prisoner’s Dilemma” is a. a sequential game in which the Nash equilibrium arises from dominant strategies b. a simultaneous game that has multiple Nash equilibria c. a sequential game that has multiple Nash equilibria d. a simultaneous game in which the Nash equilibrium arises from dominant strategies 5. If the price of freshwater fish increases due to a shortage of clean lakes, how would this affect the market demand for freshwater fish? a. It would cause the market demand to shift to the left. b. It would cause the market demand to shift to the right. c. It would cause a movement along the demand curve to the left. d. It would cause a movement along the demand curve to the right. Quantitative Problems (47 points): 1. (10 points) You have two equations that represent the supply and demand for homemade greeting cards: Q = 3.5 – 1/10 P Q = 2 + 1/5 P a. Which of these is the demand curve? (2 points) Q = 3.5 – 1/10 P b. What is the equilibrium price and quantity of greeting cards in this market? (3 points) 3.5 - (1/10)P = 2 + (1/5)P 1.5 = (3/10)P 15 = 3P P = 5 Plug in: Q = 2 + (1/5)*5 = 3 (2 points out of 3 if you got P or Q but not both) c. What is the price elasticity of demand at this equilibrium point? Is demand elastic or inelastic at this point? Need to solve D curve for P first. Then slope is -10. Formula is e = (1/slope) * (P/Q) e = 1/(-10) * (5/3) = -5/30 = -1/6 or -.166 (3 pts) Demand is inelastic at this point. (2 pts) 2
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