Herbert S

Herbert S. Levine

Economics 1

First Midterm Exam

October 12, 2000

Instructions:

This is a 60 minute exam. You have ten minutes for review.

Write all answers in the blue books provided. Show all work. Use diagrams where appropriate and label all diagrams carefully.

Write your name and your Recitation Instructor's name in every blue book that you use.

This exam is given under the rules of Penn's Honor system.

All blue books, blank or filled, must be handed in at the end of this exam. No blue books may be taken from the room.

PART I (10 minutes)

[4 minutes]

The following tables show the amount of labor (L_X, L_Y) allocated to the product of X and Y, and the corresponding output of X and Y.

Labor Input Output Labor Input Output

L_X X L_Y Y

0 0 0 0

1 10 1 16

2 18 2 29

3 24 3 39

4 28 4 46

5 30 5 50

Assume that the total labor supply (L_X+L_Y) is 4.

Draw the Production Possibilities Frontier.
What is the opportunity cost, in units of Y, of increasing the production of X from 24 to 28?
Draw a graph that shows the opportunity cost function for X, i.e., the amount, in units of Y, that have to be foregone to produce one additional unit of X.

2. [6 minutes]

In Figure 1, I is a budget constraint (budget line) of $120. The unit price of X is $3, while the unit price of Y is $4. Based on this figure, answer the following multiple choice questions. Indicate briefly why you chose the answer you did:

The value of Y at A is:

At point B, the total expenditure on the two goods is:

The same as at point A
It is more than at point A, but less than at point C
We cannot conclude anything about the expenditure at points A,B, and C.
The expenditure on X at point C is the same as at point B.

At point B

The total utility of the consumer is the same as at point C
The marginal utility of X (measured in money terms) is greater than $3.
The allocation of expenditure on both goods (X and Y) is optimal.
The total utility cannot be the same as at point D because the total expenditure at D is smaller than at B.

As a result of an increase in the price of X, the consumer decides to move from optimal point C to a new equilibrium at point D. We can conclude the following:

[For the following questions, indicate whether you agree or disagree and briefly explain why.]

"The purchasing power (real income) of the consumer decreases".
"X is an inferior good".

PART II (30 minutes)

Indicate whether the statements below are TRUE, FALSE, or UNCERTAIN, and WHY.

[5 minutes each]

The demand curve for X is negatively sloped if X is a normal good, and may be negatively sloped, but less price elastic if X is an inferior good.
The Production Possibilities Frontier bows outward because of the law of diminishing marginal productivity.
In his article "Less Cost, More Risk", Kinsley argues that the level of safety should be the same for all flights no matter what their cost.
The indifference curves of an individual cannot cross.

Diamonds are more valuable than water, because of the scarcity of diamonds.

6. To calculate the substitution effect of a change in the price of a good, an alternate

tangency point, on the buyer's original best affordable indifference curve, must be

found.

PART III (10 minutes)

[Section Specific - Levine]

Show how a demand curve for a product can be derived from cardinal assumptions of utility and from ordinal assumptions of utility.