Basaluzzo/Li

Economics 1

First Midterm Exam (Departmental Honors)

October 12, 2000

Instructions:

Good Luck!

PART I (20 minutes)

 

  1. [8 minutes]

 

Five workers produce food products and clothing, but have different "efficiencies" in the production process according to the following table:

 

 

Units of Food Product

Units of Clothing Product

Worker 1

Worker 2

Worker 3

Worker 4

Worker 5

4

5

4

3

6

1

2

12

3

2

 

    1. Plot the production possibilities frontier
    2. The consumers like to consume food and clothing at fixed ratio of 1:1. Mention the workers who produce food and who produce clothing.

c. Suppose that the employer of the 5 workers wants to maximize revenues from the sale of food and clothing products. According to the prices of both goods he decides that all workers should produce food. What can you tell about the ratio of prices Pf/Pc?

 

 

 

2. [12 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:
    1. The value of Y at A is:
    1. 40
    2. 30
    3. 120
    4. 12
    1. At point B, the total expenditure on the two goods is:
    1. The same as at point A
    2. It is more than at point A, but less than at point C
    3. We cannot conclude anything about the expenditure at points A, B, and C.
    4. The expenditure on X at point C is the same as at point B.
    1. At point B
    1. The total utility of the consumer is the same as at point C
    2. The marginal utility from the last dollar expenditure on good X is larger than the marginal utility from the last dollar expenditure on good Y.
    3. The allocation of expenditure on both goods (X and Y) is optimal.
    4. The total utility cannot be the same as at point D because the total expenditure at D is smaller than at B.
    1. 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:
    1. "The purchasing power (real income) of the consumer decreases".
    2. "X is an inferior good".
    3. "Y is a normal good".

Indicate whether you agree or disagree and briefly explain why for each statement.

PART II (20 minutes)

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

[5 minutes each]

  1. The demand curve for X is negatively sloped if X is a normal good but less price elastic if X is an inferior good.
  2. 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.
  3. Diamonds are more valuable than water, because of the scarcity of diamonds.
  4. 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)

In the market of good Q there are N identical firms and M identical consumers. Each of the firms has an individual supply function of the form

P = 10 + q

Whereas each of the consumers' demand function is

P = 100 - q

The price in equilibrium is $70. Some time later the government decides to impose an excise tax of $30 per unit sold. The market quantity demanded of Q drops down now to 4000.

    1. Find the number of firms and consumers in the economy.
    2. What are the consumers' and producers' burdens?
    3. What was the consumer surplus before taxes? And after taxes?

(If you find difficulty with the computations in (a), to answer questions (b) and (c) assume that you know M and N and explain in detail how you would proceed in order to get partial credit..)