Economics i

General Honors

University of Pennsylvania

Fall 2001

Brett Norwood

Midterm #1 (100 Points)

Instructions:

This is a 60-minute examination; 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.

Write your name and your Recitation Instructor's name on your copy of the exam questions.

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

All blue books and the exam questions, blank or filled, must be handed in at the end of this exam. 

No blue books, or exam questions, may be taken from the room.

The use of Programmable Calculators is in violation of Departmental rule. It is strictly forbidden!

Question 1. (40 points) Suppose Bill and Ted can each make wine and cheese at rates given by the table below. (40 points)

Wine

Cheese

Bill

8 bottles per hour

2 blocks per hour

Ted

0.5 bottles per hour

1.5 blocks per hour
  1. Who has an absolute advantage in the production of wine (if anyone does), and why? Who has an absolute advantage in the production of cheese (if anyone does), and why? (8 points)
  2. Based on this information, can you conclude if it is possible for both people to benefit from trade? Why or why not? Can you conclude who will specialize in the production of which good, that is, what good each person would produce for trade to the other? (4 points)
  3. Who has a comparative advantage in the production of wine (if anyone does), and why? Who has a comparative advantage in the production of cheese (if anyone does), and why? (8 points)
  4. Based on this information, can you conclude if it is possible for both people to benefit from trade? Why or why not? Can you conclude who will specialize in the production of which good, that is, what good each person would produce for trade to the other? (4 points)

    5.  

     

  5. Given your answer in (d), in terms of bottles of wine per block of cheese, what is the highest exchange rate at which both Bill and Ted would both be willing to exchange wine for cheese? In terms of bottles of wine per block of cheese, what is the lowest exchange rate at which both Bill and Ted would be willing to exchange wine for cheese? (8 points)
  6. Draw Bill's PPF with wine on the vertical axis, assuming there is no trade. On the same graph, draw Bill's consumption possibility frontier assuming he can trade as much wine or cheese as he can produce at an exchange rate of 1.0 bottles of wine per block of cheese. Prove that he is better off when he trades, as long as "more is better". (8 points)

 

Question 2. (12 points)

Suppose: Qx = quantity of hamburger demanded;

Px = price of hamburgers; and

Py = price of hamburgers buns.

Suppose that the quantity of hamburgers (Qx) depends only on Px and Py, so the demand function for hamburgers is Qx = f(Px, Py). Given what you know about hamburgers, determine whether each of the following could represent the demand for hamburgers? Please explain. (12 points)

i) Qx = 100 - Px - Py

ii) Qx = 100 - Px / Py

iii) Qx = 100 - Px * Py

iv) Qx = 100 - Px + Py

 

Question 3. (36 points) Suppose that the supply and the demand for cigarettes can be characterized by:

Supply:

Qs = 600 + 100P

Demand:

Qd = 1500 – 50P

where Qs is the supply of packs of cigarettes, and Qd is the demand for packs of cigarettes.

a. Draw the supply and demand curves, labeling axis, intercepts, and indicating slopes. (8 points)
  1. In equilibrium, how many packs of cigarettes are purchased? What is the equilibrium price? (8 points)
  2. What is the consumer surplus? (6 points)
  3. Suppose that an advalorem tax of 200% is levied. What is the new equilibrium? (8 points)
  4. What is the new consumer surplus? (6 points)

 

Questions 4. (12 points)

Suppose that the preferences of a consumer over goods x and y are represented by the following utility function:

U(x, y) = x + y,

where x and y indicate the quantity of goods x and y consumed, respectively.

a. Graph the indifference map for this utility function; that is, draw a few indifference curves. (6 points)

b. Now suppose that the consumer has the usual budget constraint, where W = wealth:

W = Px*x + Py*y,

where Px and Py are the prices of good x and y, respectively, x and y are the quantities of good x and y consumed, respectively, and I is the income (a.k.a.,

budget or income) of the consumer.

Suppose that Py > Px. What is the optimal level of consumption of goods x and y? (6 points)