Download MIDTERM EXAMINATION 1

MIDTERM EXAMINATION 1
Intermediate Microeconomics
(ECON 520)
September 21, 1999
Professor D. Weisman
There are two parts to this examination weighted 50 points each. Please write legibly and
think carefully about your answers. You may find that graphical and/or mathematical
analysis will assist you in answering some of these questions. Good Luck!
Part I. Multiple Choice (50 points). Please indicate your choice for the best answer to
each question on the standardized answer sheet provided.
1.
Which of the following is a positive statement?
a.*
A course in microeconomics tends to increase student scores on the law
school admissions test (LSAT).
b.
College football coaches should not be paid more than economics
professors.
c.
Smoking should be restricted on all airline flights.
d.
Requiring all students to take at least one semester of Calculus is a bad
idea.
e.
None of the above.
2.
In order to determine whether hurricane Floyd is more costly than hurricanes
Andrew and Hugo, it
a.
is necessary to compare the damage in nominal dollars for each of the
three hurricanes.
b.
is necessary to compare the damage in real dollars for each of the three
hurricanes.
c.
will not matter whether real costs or nominal costs are compared.
d.
will be necessary to take into account the change in the value of the dollar
over the time period of each of these hurricanes.
e.*
b and d.
3.
MBA applications tends to increase during downturns in the economy because
a.
the opportunity cost of earning an MBA is lower during these times.
b.
there are fewer high paying jobs available during these times.
c.
tuition expenses are lower during economic downturns.
d.
student loans are plentiful during economic downturns.
e.*
a and b.
4.
A technological advance in automobile production will likely result in
a.
a decrease in the equilibrium price of automobiles.
b.
an increase in the equilibrium price of automobiles.
c.
no change in the equilibrium quantity of automobiles.
d.
e.*
an increase in the equilibrium quantity of automobiles.
a and d.
Use the following information to answer the next five questions:
The demand for books is:
The supply of books is:
QD = 100 – 2P
QS = 3P
5.
What is the equilibrium price of books?
a.
5
b.
10
c.
15
d.*
20
e.
none of the above.
6.
What is the equilibrium quantity of books sold?
a.
25
b.
50
c.
40
d.
100
e.*
none of the above
7.
The price elasticity of demand at the market equilibrium is
a.*
inelastic.
b.
elastic.
c.
unitary elastic.
d.
inferior.
e.
none of the above.
8.
What is consumers’ surplus at the market equilibrium?
a.*
900
b.
450
c.
100
d.
1200
e.
200
9.
What is consumers’ surplus if the government imposes a maximum price of 10?
a.
675
b.
450
c.
900
d.
600
e.*
none of the above.
10.
Suppose that the price elasticity of demand for electricity is -1.5 at the market
clearing price and that supply is perfectly inelastic. What will result from a price
ceiling that is 10 percent below the market clearing price?
2
a.
b.
c.
d.*
e.
Consumers will be better off.
Consumers may be better or worse off.
A shortage equal 15 percent of the market clearing quantity.
a and c.
b and c.
11.
In class, we discussed a recent article that suggests cocaine is an inferior good. If
income were to rise, ceteris paribus, the equilibrium price of cocaine would
a.
rise.
b.*
fall.
c.
remain unchanged.
d.
a or c.
e.
b or c.
12.
If the price of automobiles were to increase ceteris paribus, this would be
expected to result in
a.
an increase in the equilibrium price of gasoline.
b.*
a decrease in the equilibrium price of gasoline.
c.
no change in the equilibrium price of gasoline.
d.
an increase in the consumers’ surplus in the market for automobiles.
e.
none of the above.
13.
A business firm faces a demand curve for its product that is given by Q = 20-P.
The firm implements a small price change that results in an increase in both
revenue and consumers’ surplus. This implies that the
a.*
price was reduced and the initial price was greater than 10
b.
price was increased and the initial price was greater than 5.
c.
price was reduced and the initial price was less than 10.
d.
price was increased and the initial price was greater than 8.
e.
none of the above.
14.
If a firm sets a price at which the price elasticity of demand is equal to –1 then
a.
the firm is maximizing revenue at this price.
b.
a small change in price will not result in a change in revenue.
c.
the price should be raised to increase revenue.
d.
the price should be reduced to increase revenue.
e.*
a and b.
15.
The price elasticity of demand is –2. If demand increased by 10 percent, then the
price
a.
increased by 5 percent.
b.*
decreased by 5 percent.
c.
increased by 10 percent.
d.
decreased by 10 percent
e.
none of the above.
3
16.
The price elasticity of long-distance telephone service is –0.7 and the cross
elasticity of long-distance and local telephone service is –0.25. Price changes are
implemented that result in an increase in the quantity demanded of long-distance
telephone service of 10 percent. If the price of long-distance telephone service is
reduced by 20 percent, what is the implied change in the price of local telephone
service?
a.
a 10 percent increase.
b.
a 10 percent decrease.
c.*
a 16 percent increase.
d.
a 5 percent increase.
e.
a 5 percent decrease.
17.
Suppose that the demand function for legal services is given by Q = 100P-0.6,
where P is the price of legal services and Q is the quantity of legal services
demanded. A 20 percent increase in the price of legal services ceteris paribus
implies that
a.*
the demand for legal services will decrease by 12 percent.
b.
the demand for legal services will increase by 12 percent.
c.
the demand for legal services will remain unchanged.
d.
none of the above.
Use the following information to answer the next 3 questions. The demand for product 1
is given by Q1 = 40 - 4P1 - 2Y - 1P2, where Q1 is the demand for product 1, P1is the price
of product 1, Y is income and P2 is the price of product 2.
18.
Product 1 and product 2 are
a.
substitutes.
b.*
complements.
c.
independent goods.
d.
none of the above.
19.
An increase in Y, ceteris paribus, will
a.*
increase the own price elasticity of demand for product 1 in absolute
value.
b.
decrease the own price elasticity of demand for product 1 in absolute
value.
c.
have no effect on the own price elasticity of demand for product 1.
d.
increase the demand for product 1.
e.
none of the above.
20.
Compute the income elasticity for product 1 when P1 = 4, Y = 10 and P2 = 2.
a.*
-10
b.
-5
c.
4
d.
0
e.
none of the above.
4
Part II. Problems (50 points). There are two questions and each is worth 25 points.
Show all of your work to receive partial credit. Please write legibly and be precise with
your answers.
1.
Analysis of Supply and Demand.
a. The price elasticity of demand is equal to –2 when P = 6 and Q = 12. Find the
equation of the linear demand curve: QD = a – bP, where a and b are constants?
b. Suppose that the supply function is given by QS = 2P. Use the demand function
you derived in part a to find the equilibrium price and quantity. What is
consumers’ surplus at this market equilibrium?
c. What is the single price that generates the maximum level of revenue in this
market? What is this maximum level of revenue? What is the price elasticity of
demand at the corresponding price and quantity?
d. Suppose now that the supply function is given by QS = 2P + T, where T is an
index of technological progress in this particular industry. Higher levels of T
correspond to higher levels of technological advance. Using the demand
function you derived in part a, derive a mathematical expression that explains
how the equilibrium price that prevails in this market varies with the level of
technological advance. Provide an economic interpretation of your finding.
2.
This question concerns our classroom discussion of the article “The Demand For
Illicit Drugs” that appeared in the July 1999 issue of Economic Inquiry. Suppose
that the demand for cocaine is given by QC = 36 – 3PC – 1J, where QC and PC are
the quantity and price of cocaine, respectively, and J is the average amount of jail
time served for conviction of cocaine use. Let the supply of cocaine be given by
QC = 1PC.
a. Determine the equilibrium price and quantity of cocaine when J = 4.
b. Illustrate your results in part a graphically. Make sure that you clearly indicate
the vertical and horizontal intercepts for the demand function as well as the
equilibrium outcome.
c. Let the demand for marijuana be given by QM = 100 - 2PM – PC – F, where
QM and PM are the quantity and price of marijuana, respectively, and F is the
dollar amount of the fine assessed upon conviction of marijuana use. Let the
supply of marijuana be given by QM = 2PM. Determine the equilibrium price
and quantity of marijuana when F = 4? [Note: assume that your findings in
part a continue to hold.]
5
d. What effect does a change in the average jail time for conviction of cocaine
use (J) have on the equilibrium price of marijuana? Provide an economic
interpretation of your findings.
6