Economics 1
1st Midterm Examination
Thursday, October 12, 1995


Instructions:
1.	Answer all sections of this test. This is a 60 minute exam.  
2.	Graphs are helpful. Carefully label all graphs that you use.
3.	Write all answers in the blue books provided. Show all work.
4.	Write your name and your instructors name in every blue book that
you use.
5.	This exam is given under the rules of Penn's Honor System.
6.	All blue books, blank or filled, must be handed in at the end of
this exam. No blue books may be taken from this room.



PART I (5 Minutes)

In "Fare Rise Hit Buses Harder Than Subway, M. T. A. Says", Edward Burks
reports that an increase in fare resulted in a much greater decline in bus
ridership than subway ridership. What is the major reason this article
mentions as an explanation for this relatively greater elasticity of
demand for bus rides?


PART II (24 Minutes; 4 minutes each part)

State if the following is true, false or partly true. Explain.

1. The price elasticity of demand along a straight line demand curve is
constant.

2. Due to the substitution effect, the supply of labor will always
increase when the wage rate goes up.

3. After the hurricane Luis hit Antigua, the island's  Production
Possibilities Frontier shifted outwards.

4. If demand is perfectly elastic, a rightward shift of the supply curve
will not decrease the equilibrium price.

5. Even when all consumers pay the same price for a product, the amount of
the consumer surplus may vary for each individual.

6. An inferior good is one for which the income effect is weaker than the
substitution effect.PART III {(16 Minutes; 5 minutes each for (a) and (b);
6 minutes for (c)}

Suppose that the market demand and the market supply of Twinkies in the
Philadelphia area is given by the following equations:


	Demand for Twinkies          Qd = 1000 - 10 P

	Supply of Twinkies             Qs = 100 + 20 P


a) Calculate the Equilibrium Price and the Equilibrium Quantity of
Twinkies for this market.

b) If the Rendell Administration legislates that the Twinkies can not be
sold at more than $10 a piece, calculate the amount of the excess demand
or excess supply of Twinkies in this market.

c) Suppose that due to an increase in the price of muffins the equation of
market demand for Twinkies becomes as follows: 

	New Demand for Twinkies          Qd = 1200 - 10 P

Based on the above information answer the following questions:

	(i) Are Twinkies and muffins complements or substitutes? Briefly explain.

	(ii) If in addition to the above change in demand, the supply
curve for Twinkies shifts to the right what can you deduce about the
direction in which equilibrium price and equilibrium quantity will change
(no calculations needed)? 


PART IV (15 Minutes)

Instructor specific question.