MIDTERM EXAMINATION II Intermediate Microeconomics (ECON 520) October 20, 2005 Professor D.

Weisman

Instructions: There are two arts to this e!amination wei"hte# 50 oints each. P$ease write $e"ib$% an# thin& caref'$$% abo't %o'r answers. (o' ma% fin# that "ra hica$ an#)or mathematica$ ana$%sis wi$$ assist %o' in answerin" some of these *'estions. +oo# ,'c&Part I. Multiple Choice (5 points!. P$ease in#icate the best answer to the *'estion on the stan#ar#i.e# answer sheet ro/i#e#. 0. 1n#ifference c'r/es for a erfect s'bstit'tes 'ti$it% f'nction are a. $inear. b. characteri.e# b% a #iminishin" mar"ina$ rate of s'bstit'tion. c. characteri.e# b% a constant mar"ina$ rate of s'bstit'tion. #.2 a. an# c. e. none of the abo/e. Consi#er the fo$$owin" three mar&et bas&ets: 05 07 09 C$othin" 05 08 0:

2. 3oo# 4 6 C

1f bas&ets 6 an# C are on the same in#ifference c'r/e an# if references satisf% a$$ fo'r of the 's'a$ ass'm tions: a. 4 is referre# to 6. b. 4 is referre# to C. c. 4 is on the same in#ifference c'r/e as 6. #. 4 is on the same in#ifference c'r/e as C. e.2 a an# b are both correct. 7. a. b.2 c. #. e. 9. En/ision a "ra h with meat on the hori.onta$ a!is an# /e"etab$es on the /ertica$ a!is. 4 strict /e"etarian wo'$# ha/e in#ifference c'r/es that are: /ertica$. hori.onta$. #ia"ona$ strai"ht $ines. ri"ht an"$es. ' war# s$o in". ;i&e% has a 'ti$it% f'nction "i/en b% < = 00 min >2C, ;? where C is cerea$ an# ; is mi$&. Cerea$ costs 9 cents er 'nit an# mi$& costs @ cents er 'nit. 1f ;i&e% has income

of A5 then to ma!imi.e 'ti$it% ;i&e% 'rchases a. 90 'nits of cerea$ an# 50 'nits of mi$&. b. 50 'nits each of cerea$ an# mi$&. c.2 50 'nits of cerea$ an# 000 'nits of mi$&. #. 000 'nits each of cerea$ an# mi$&. e. none of the abo/e. 5. a. b. c.2 #. e. @. 4 c'r/e that re resents a$$ combinations of mar&et bas&ets that ro/i#e the same $e/e$ of 'ti$it% to a cons'mer is ca$$e#: a b'#"et $ine. a #eman# c'r/e. an in#ifference c'r/e. a cons'mersB s'r $'s c'r/e. none of the abo/e. 1f Ci$$Bs ;DEPF6 = 2, Ci$$ wo'$# wi$$in"$% "i/e ' : a. 2, b't no more than 2, 'nits of i..a for 0 a##itiona$ 'nit of beer. b. 2, b't no more than 2, 'nits of beer for 0 a##itiona$ 'nit of i..a. c. 0, b't no more than 0, 'nit of beer for an a##itiona$ 2 'nits of i..a. #. 0)2, b't no more than 0)2, 'nits of i..a for 0 a##itiona$ beer. e.2 b. an# #. CohnBs 'ti$it% f'nction is "i/en b% < = 9P G 26. E' a$$ 6 an# no P in e*'i$ibri'm, then a. P6 = 2 b. P6 H 0 c. P6 = 0 #. P6 I 2 b or c. ose that PP = 2. 1f Cohn cons'mes

:.

e.2 5.

1f rices an# income in a twoF"oo# societ% #o'b$e, what wi$$ ha en to the b'#"et $ineJ a. The interce ts of the b'#"et $ine wi$$ increase. b. The interce ts of the b'#"et $ine wi$$ #ecrease. c. The s$o e of the b'#"et $ine ma% either increase or #ecrease. #. There is ins'fficient information to #etermine the effect on the b'#"et $ine. e.2 There wi$$ be no effect on the b'#"et $ine. Da"woo#Bs 'ti$it% f'nction for beers (6) an# i..as (P) is "i/en b% < = 96KP. What is Da"woo#Bs mar"ina$ 'ti$it% of i..a when @ beers are cons'me#J a.2 29 b. @ c. @0 #. 00 This cannot be #etermine# from the information ro/i#e#. Which of the fo$$owin" is $east $i&e$% to re resent an act'a$ #eman# c'r/e. L = 000)M2PG 1N. L = 020 F 7P G 21.
2

8.

e. 00. a. b.

c.2 #. 00.

L = 000 G 7P G 21. L = 2001)P. e. a. an# #. The rice for a "oo# increases an# tota$ e! en#it'res for the "oo# increase. This im $ies that a. #eman# is e$astic. b.2 #eman# is ine$astic. the "oo# is a norma$ "oo#. #. the "oo# is an inferior "oo#. e. #eman# is of 'nitar% e$asticit%. The area be$ow the #eman# c'r/e an# abo/e the rice $ine meas'res. a.2 cons'mersB s'r $'s. b. economic rofit. c. ro#'cerBs s'r $'s. #. e$asticit% of #eman#. e. none of the abo/e. The #eman# for i..a is #ownwar#Fs$o in". This im $ies that Pi..a is a norma$ "oo#. Pi..a is an inferior "oo#, b't not a +iffen "oo#. Pi..a is a +iffen "oo#. a. or b. none of the abo/e is necessari$% tr'e. Oaro$# treats beer an# i..a as erfect s'bstit'tes. Oaro$# #eri/es 9 'nits of 'ti$it% from each beer (6) cons'me# an# 2 'nits of 'ti$it% from each s$ice of i..a (P) cons'me#. Oaro$#Bs 'ti$it% f'nction is re resente# b% which of the fo$$owin"J a. < = min >96, 2P?. < = 96 G 2P. < = 0)96 G 0)2P. < = 69 K P2. < = 26 G 9P. CohnBs #eman# for i..a #ecreases when the rice of beer increases. 1n a##ition, Cohn a$wa%s cons'mes 2 beers with each s$ice of i..a. Which of the fo$$owin" re resents CohnBs 'ti$it% f'nction. < = 26P. < = 00 min>6, 2P?. < = 26 G 0P. < = 5 min >26, P? none of the abo/e. Cas erBs 'ti$it% f'nction for Pi#eos (P) an# ;o/ies (;) is "i/en b% < = 9P G ;. E' ose that PP = 9 an# P; = 2. 1f Cas er has income of A000, his e*'i$ibri'm cons'm tion b'n#$e is P = 25 an# ; = 0.
7

c.

02.

07 a. b. c. #.2 e. 09.

b.2 c. #. e. 05. a. b.2 c. #. e. 0@. a.2

b. c. #. e. 0:. a.2 b. c. #. 05.

P = 0 an# ; = 50. P = 20 an# ; = 00. P = 00 an# ; = 70. 4n% combination of P an# ; that e!ha'sts income of A000. Caro$s 'ti$it% for 6eer (6) an# Pi..a is "i/en b% < = 006KP. E' ose that Caro$ is c'rrent$% e!ha'stin" her income on 6 an# P an# cons'min" a combination of 6 an# P s'ch that ;<6) ;<P I P6)PP. Caro$ can increase her 'ti$it% b% increasin" 6 an# #ecreasin" P in her cons'm tion b'n#$e. #ecreasin" 6 an# increasin" P in her cons'm tion b'n#$e. contin'in" to cons'me the c'rrent amo'nts of 6 an# P. #ecreasin" 6 an# #ecreasin" P in her cons'm tion b'n#$e. e. none of the abo/e. E' ose that the rice of beer increases. The s'bstit'tion effect res'$ts in a #ecrease in beer cons'm tion of 9 'nits. The income effect res'$ts in an increase in beer cons'm tion of @ 'nits. This im $ies that a. beer is a norma$ "oo#. b. beer is an inferior "oo#, b't not a +iffen "oo#. c. the income effect #ominates the s'bstit'tion effect. #. the #eman# c'r/e for beer is ' war#Fs$o in". e.2 c. an# #. E' ose that 6eer (6) an# Pi..a (P) are com $ements an# that i..a is an inferior "oo#. 3o$$owin" stan#ar# notation, $et P an# P6 #enote the rice of i..a an# beer, res ecti/e$% an# $et 1 #enote income. Which of the fo$$owin" #eman# f'nctions ref$ect these ro erties. P = 1)M2P N. P = 00)1MP G 9P6N. P = 001)MP G 9P6N. a. an# c. none of the abo/e. When ne"ati/e networ& e!terna$ities are resent, a. the #eman# c'r/e is more e$astic than otherwise. b.2 the #eman# c'r/e is $ess e$astic than otherwise. c. the #eman# c'r/e shifts to the $eft. #. the #eman# c'r/e shifts to the ri"ht. e. none of the abo/e are necessari$% tr'e.

08.

a. b.2 c. #. e. 20.

Part II. Pro"lems (5 points!. 4nswer both *'estions. The oint /a$'es are in#icate# after each *'estion. Ehow a$$ of %o'r wor& to recei/e artia$ cre#it. Write $e"ib$% an# be recise with %o'r answers. 0. a) 6i$$Bs 'ti$it% f'nction is "i/en b% < = 26KP, where 6 re resents the n'mber of beers an# P re resents the n'mber of i..as. 4$so, ;<P = 26 an# ;<6 = 2P. E' ose that 1 = A020, P = 9 an# P6 = 2. 3in# the /a$'es of 6 an# P that arise in
9

cons'mer e*'i$ibri'm. What is the tota$ $e/e$ of 'ti$it% "enerate# at this cons'mer e*'i$ibri'mJ (02) b) c) Deri/e 6i$$Bs #eman# f'nction for i..a (P) "i/en 1, P , an# P6. (@) +i/en the #eman# f'nction %o' #eri/e# in art b), #etermine (i) whether P an# 6 are norma$ or inferior "oo#sQ an# (ii) whether P an# 6 are com $ements, s'bstit'tes or in#e en#ent "oo#s. (@) 1n#ifference c'r/es an# 'ti$it% f'nctions. Caro$ treats beer an# i..a as erfect s'bstit'tes. (o' are "i/en that ;< 6 = 2. When P = 9 an# P6 = 2, Caro$ 'rchases 00 'nits each of beer an# i..a in e*'i$ibri'm. What is the e*'ation of Caro$Bs 'ti$it% f'nctionJ Oow m'ch income #oes she ha/e to s en#J Constr'ct a re resentati/e in#ifference ma for Caro$. (02) b) 6obBs 'ti$it% f'nction for beer an# i..a is "i/en b% < = 00 min >26, P?. E' ose that 6ob cons'mes 20 i..as in e*'i$ibri'm. Oow man% beers #oes 6ob cons'me in e*'i$ibri'mJ What is 6obBs tota$ 'ti$it% with this mar&et bas&etJ Constr'ct a re resentati/e in#ifference ma for 6obBs 'ti$it% f'nction an# in#icate the artic'$ar in#ifference c'r/e that corres on#s to the e*'i$ibri'm o'tcome in this rob$em. (02) b) 6ob a$wa%s cons'mes beer an# i..a in fi!e# ro ortions. E ecifica$$%, 1f 6ob has 0 i..a, he cons'mes recise$% 2 beers an# a##itiona$ beers re resent no a##itiona$ 'ti$it% for 6ob. Eimi$ar$%, if 6ob has 2 beers, he cons'mes recise$% 0 i..a an# a##itiona$ i..as re resent no a##itiona$ 'ti$it% for 6ob. 1n a##ition, when 6ob has 9 i..as an# 00 beers, his 'ti$it% is 72. Rath% $o/es i..a an# is ne'tra$ towar# beer (i.e., she neither $i&es nor #is$i&es beer). Ehe #eri/es 9 'nits of satisfaction from each i..a she cons'mes.

2. a)

c)