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Midterm

Microeconomics for E&BE: Consumers and Firms 2019/2020

Tuesday 1 October 2019, 20:00-22:00 (3 questions)

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Student number:

Q2:

Q3:

⌃:

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Question 1 (10 points)
Afaik \
If
Use the multiple choice answer sheet for these questions.
¥6
3-
Do NOT write your registration number on that sheet.

Make sure to enter your student number correctly: do NOT use the first
line intended for the version number. US -36
12
D S
i) Demand and supply curves of a good are given by Q = 48 2P and Q = P respectively.
Calculate the price elasticity of demand at the equilibrium price D= 18
A) 1 US 2P= P
-

0=12
✓
B) 2 48=30 I
/
8
C)
D)
1/3
16
p* -16
0*-16 T -4-2×1%54=2
ii) In a market equilibrium, consumer surplus and producer surplus both equal 500. Due to
the introduction of a tax, consumer surplus decreases to 300, producer surplus decreases
to 400, and a deadweight loss of 50 emerges. What is total tax revenue?
PS 50
✓ CS -
⇐

A) 250
B) 300 Cs = 400
C) 350 PS = 300
D) There is not enough information to tell.
50 = Dkk
iii) Which of the following supply curves (where P is price per bushel and QS measures
number of bushels) generates e64 of producer surplus at a market price of e10 per
bushel?
Bxth
# ✗

☒
A) QS = 7.5P 15.
PS
=

B) QS = 10P 3.
B- "
64=-2
S
C) Q = 2P 4. -

BU
D) QS = 6P 8. 128
-
-

iv) The utility function U = X/Y violates the assumption of

A) completeness

✓
B) non-satiation
C) transitivity
D) ordinality

1
 v) Pim always spends exactly half of his income on bikes, regardless of the price of bikes.
His current income is 2500, the price of bikes is given by PB . What is his demand for
bikes?
✗
A) QD
B = 2500 PB
=
BPB
BOS )
B) QD = 1250 PB
✓
B

C)
D) QD
QD
= 2500/P
B

B = 1250/PB
B

25¥ >

vi) The market for pens consists of only two consumers, Mark and Lotte. Their demand
curves are given by QM = 10 0.1P and QL = 5 0.1P respectively. What is the market
demand curve?

A) QD = 15 0.2P if P  50 and QD = 5 0.1P if P > 50

-
B) QD = 15 0.2P if P  50 and QD = 10 0.1P if P > 50
C) QD = 15 0.2P if P 50 and QD = 10 0.1P if P < 50
D) QD = 15 0.2P
IO - O -
IP +5-0.1 P
150
15 -
0.2 P
B
100

50

50 100 150
A

Figure 1: A budget line.

-1=300
vii) Mart spends all his money on avocadoes and burritos. His total income is 300. His budget
line is given by Figure 1, with A the number of avocadoes and B the number of burritos
he consumes. What can explain its shape?

A) The price of avocados is 3, and the price of burritos is 2.

B) The price of both avocadoes and burritos is 3, but Mart gets a 1 euro discount on
burritos if he consumes more than 50 of them.
C) The price of both avocadoes and burritos is 3, but if Mart consumes more than 50
burritos, he gets a 50% discount on every additional burrito that he buys.
D) None of the above.

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viii) Anouk is a rational utility-maximizing consumer. She only consumes two goods, X and
Y , and would never consider other goods. Consider the following two statements:

I) In this case, it is possible that for Anouk both X and Y are inferior goods.
II) In this case, it is possible that for Anouk both X and Y are luxury goods.

A) Both statements are true

✓
B) Both statements are false
C) Statement I is true, statement II is false
D) Statement I is false, statement II is true

ix) Hanna consumes tomatoes and cucumber. At a price of 3, she consumes 65 tomatoes.
If the price increases to 3.50, she consumes 55 tomatoes. After the price increase, she
would need an additional income of 9 to make her just as well o↵ as she was before. If
she would receive that additional income of 9, she would then consume 61 tomatoes.
What is the income e↵ect of the price change?

✓
A)
B)
4
6
= 55-61
C) 9
D) 10

150
B
100

50

50 100 150 200 250 300

A

Figure 2: Some indi↵erence curves.

x) Gert-Jan consumes products A and B. Figure 2 gives some of his indi↵erence curves.
Which of the following statements is true for Gert-Jan?

A) He likes the two goods equally well.

B) He dislikes both goods.
C) The goods are perfect complements.

✓
D) The goods are perfect substitutes.

3
Question 2 (10 points)
Johnny has just started his undergraduate degree in Groningen and, with his mom no longer
monitoring his diet, is indulging himself in deep-fried delicacies, especially the Groningen spe-
ciality of egg balls1 (denoted by E) as main dish and deep-fried Mars bars (denoted by M ) for
dessert. His utility function is given by:

U = E 4M 3

The price of an egg ball is 4 euro and the price of a deep-fried Mars bar is 1 euro. Johnny
spends 700 euros per month on these two food items.

a) (2pt) Calculate the marginal rate of substitution (MRS) at E = 80 and M = 30. Explain
the economic interpretation of the MRS at this point.

ñm=¥m=:÷÷=
MRS -

Mur

1- É 'm
1- BE -
M =

4¥ =

}•=!É¥
MRS
I
-

lnlhich means
Johnny is knitting to

bars to
giveextraup 1-2 a
Mars obtain

ban
an
regg
.

1
Locally referred to as the aaierbal.

4
b) (2pt) How many egg balls and deep-fried Mars bars will Johnny consume? In other
words, what is his utility-maximizing choice?

4¥ 9- -

too = HE -1M
700 = HE + 3E
4M = RE
M 700 = FE
=
3£
E- 100

b- M=E Me 300

c) (2pt) Derive and draw the Engel curve for deep-fried Mars bars.

4- HE -1M

Y=
4- Mtm G- +1
HIM F-
side -

Note
700
200
}=µ
-

600=704
¥-=M
,
5
d) (2pt) The city of Groningen has decided to subsidize egg balls to support the local egg
ball industry. As a consequence the price of egg balls drops and Johnny’s optimal choice
is now to consume 200 egg balls. By how much has the price of an egg ball dropped?

MRS
:L
=

=
PE
UM =3 PEE 450 PE.to

PE.to#FX5Y50Pr=Et3Pyr=F--=700Pr=--
M=3PrgE_
2

¥ PEE = 700

I * ¥ .PE#o-Eozoo
e) (2pt) Johnny’s change in demand as consequence of the price drop of egg balls can be
decomposed into a substitution e↵ect and an income e↵ect. Explain what we mean by
substitution e↵ect (in words).

The substitution
effect in the
changeof
of egg ball consumption as a result
in the price balls but
the
change of egg
inlhen is compensated in such a
Johnny
that he still has the same utility
Inlay
level as before .

6
Question 3 (10 points)

The market for ham is characterized by the following demand and supply equation:
QD
H = 40 2PH 2PC ,
QSH = 2PH ,
where quantities are measured in thousands of kilograms (kg), PH is the price per kg of ham,
and PC is the price per kg of cheese.
a) (2pt) Are ham and cheese complement, substitute or unrelated goods? Explain why.

From the demand

equation , when the prices
demand for
increases , hamfalb .

Therefore ,
ham and cheese are

complement goods .

b) (2pt) Determine the equilibrium price and quantity in the market for ham when PC =
8. At this equilibrium, suppose the price for ham increases by 1%, what is then the
percentage change in demand for ham?

0%+40 2PM -2.8

;¥z=
-

= 40 -
2PM -16
C-2) -
I

-24 2PM
-

26 -2Pa -_
2PM H .

24--4 PH
Pt*l=6 0*1=12

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c) (2pt) Suppose the government imposes a tax of 5 on cheese that producers have to pay.
Assume the tax incidence on consumers in that market is 40%. Before the tax, the price
for cheese was PC = 8. Determine the equilibrium price and quantity in the market for
ham after the tax on cheese.

Then Pc*=8-12=10 2

-07=40-2%-290)
51%4%7--2
-

40-2%-20
=20-2Pµ 022PM
ZPH
20 -2Pa -

2o=UPH
PES 0*4=10
d) (2pt) Calculate the change in consumer surplus and the change in producer surplus in the
market for ham due to the tax on cheese. [If you do not have an answer to the previous
question, assume the price for cheese after tax is PC = 12.]

Cspretax -21×(12-6742)=36
Pspretax .

1-2×12×6=36
After the tax
Csneealtax -21-(10-5740)=25
Psneeaitax
ACS - AP=S= -11
__

2- ✗
5×10=25

8
e) (2pt) For this question, assume the price for cheese is back to its pre-tax level, PC =
8. Suppose the government imposes a price floor on ham equal to 7. Determine the
deadweight loss in this market due to this regulation.

0%24-2×7 a 10

Dkk >

d- (7--5) (12-10)=2

¥
=

✗ 21×2