Name: Recitation teacher’s name:

Day and time of recitation:

Microeconomics
Spring 2017
Midterm Examination

There are two sections to the exam. Part A contains 10 short-answer questions worth 4 points
each (40 points total) and Part B contains two problem-questions worth 60 points in total.

Instructions:
- Please fill in the information above and wait for the signal to begin.
- You may use only a basic calculator (no storage capacity).
- The use of class notes, textbooks is not permitted.
- Read the questions carefully. Please write legibly, and provide concise but justified
answers.
- Show your work. Include labels on axes/curves in all diagrams you draw.
- You have 1 hour and 15 minutes.

Good luck!
Part A: 10 short-answer questions (4 points each; 40 points total)

1. Suppose a firm has a cost function C = 10 + 3Q. What are this firm’s fixed costs, variable
costs, and marginal costs?

2. Suppose that a firm has the following production function: Q = 3K1/2. What is this firm’s
marginal product of capital? Does this firm exhibit diminishing marginal returns? Explain.

3. Suppose that for Ann goods x and y are perfect complements. Draw a set of Ann’s
indifference curves (more than just one). Give an example of goods that are perfect
complements.

1 of 8
4. Suppose the New York City Planning Commission makes it easier for residential building
projects to gain approval. What will happen to the price of housing? Use a graph to explain
your answer.

5. If the price of orange juice rises 10%, and as a result the quantity demanded falls by 8%, the
price elasticity of demand for orange juice is
A) -1.25.
B) inelastic.
C) Both A and B above.
D) Neither A nor B above.
Explain your answer.

6. On a graph with quantity on the x-axis and income on the y-axis, plot a graph to represent
preferences for a good (say hamburgers) that is a normal good at lower income levels and an
inferior good at higher income levels.

2 of 8
7. Ed's construction company has the following short-run cost function: q3 - 10q2 + 35q. What
positive level of output will minimize the average cost? What is the average cost at this
point?

8. Suppose that the market demand for chocolate is Q = 100 − 50P. Write down the formula of
the elasticity of demand. What is the price elasticity of the demand for chocolate at P=$0.50.
Is demand elastic or inelastic? Explain.

9. Suppose that Sharon treats orange juice and grapefruit juice as indistinguishable—she is
equally happy to have a glass of either juice. Draw a set of Sharon’s indifference curves for
orange vs. grapefruit juice. If the price of orange juice is $1 and the price of grapefruit juice
is $2, and Sharon has $10 to spend on juice, how much of each juice does Sharon consume?

3 of 8
10. Suppose the market demand for internet usage, with Q in minutes and P in dollars-per-
minute, is Q = 1000-500P. The figure below shows the market demand curve for internet
usage. Suppose that the initial price was $.40 per minute, and the new price is $1.00 per
minute. What is the change in consumer surplus? Show your work.
2

1.6

1.2
$/Minute

0.8

0.4

0
0 200 400 600 800 1000

Minutes

Part B: 2 long-answer questions (60 points total)

1. Aaron’s preferences for entertainment activities- skiing (s) and playing basketball (b) are
represented by the utility function:

1/4 3/4
U(s,b) = s b

Aaron has allocated a monthly budget for entertainment equal to $160. The prices of the two
goods he cares about are $10 for basketball (court fees) and $20 for skiing (ski rentals).

a. [5pts] What are the two conditions needed for Aaron to maximize his utility? Write
them down.

4 of 8
b. [10pts] What is Aaron’s optimal consumption of skiing and basketball?

c. [5pts] Suppose Aaron’s budget for entertainment decreases to $80. Compute his new
consumption of skiing and basketball. Are basketball and skiing normal, or inferior
goods?

d. [5pts] Suppose the price of skiing decreases to $10 (with a budget of $160 as
originally). Find Aaron’s optimal quantity choice of basketball and skiing.

5 of 8
e. [10pts] Draw the original and the new (as in part (d)) budget set on a well-labeled
graph with skiing on the horizontal axis and basketball on the vertical axis. Draw in
Aaron’s indifference curves at his optimal choices. Finally, show and label the
income and substitution effects of the price change in your diagram. Assume Aaron’s
indifference curves have the standard shape.

6 of 8
2. Suppose a toy manufacturer has the following production function: Q=F(L,K) = L*K. The
firm pays $9 per unit of capital and $1 per unit of labor. Remember that a firm’s costs are
determined by the fact that it pays r*K for its capital and w*L for its labor.

a. [5pts] What is the marginal product of capital and labor for this firm?

b. [10pts] Find the cost minimizing amounts of capital and labor this firm will use,
given that it must produce Q units of toys (Remember the condition that must be
satisfied at the cost minimizing level of output).

c. [5pts] What is the total cost of producing Q units of toys (given that the firm is using
the cost minimizing combination of labor and capital)? What is the average cost to
produce Q?

7 of 8
d. [5 pts] Does this firm have economies or diseconomies of scale? Explain.

8 of 8