Uriel Spiegel

Economics 1

First Midterm Exam

October 12, 2000

Instructions:

Good Luck!

PART I (20 minutes)

 

  1. [8 minutes]

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

Labor Input Output Labor Input Output

LX X LY 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 (LX+LY) is 4.

    1. Draw the Production Possibilities Frontier.
    2. What is the opportunity cost, in units of Y, of increasing the production of X from 24 to 28?
    3. 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. [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) Spiegel Section-Specific

The market demand for good Q is: D: P = 120 - 2Qd

The market supply of good Q is: S: P = 30 + Qs

    1. Calculate revenues of producers, consumers surplus, and price elasticity at equilibrium price.
    2. Now suppose that the government imposes a per unit tax of $20. What are the consumers expenditure, producers revenues, and tax revenues?
    3. What is the tax burden on consumers and producers?
    4. Show graphically the Deadweight Loss.