Economics 1
	1st Midterm
Fall 1996

Instructions:
1.	Answer all sections of this test. This is a 60 minute exam; 50
minutes have been directly allocated to questions; you have 10 minutes for
review.  
2.	Illustrate your answers with carefully labeled diagrams, wherever
appropriate.
3.	Write all answers in the blue books provided. Show all work.
4.	Write your name and your instructor's 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 (24 minutes)

True/False.  State whether the statement is TRUE, FALSE or PARTLY TRUE. 
Be sure to EXPLAIN your answer.

1. In his article "Roofs and Ceilings" Milton Friedman is against imposing
price floors and ceilings.

2. Along a linear demand curve price elasticity decreases as price increases.

3. If the demand curve is perfectly inelastic and the government imposes a
sales tax, then the government revenue from this tax is zero.

4. Normal goods have downward sloping demand curves.

5. A utility maximizing consumer spends her income on two commodities, X
and Y.  If the price of X is greater than the price of Y, then at the
point where utility is maximized, the marginal utility from X should be
greater than the marginal utility from Y.

6. When the marginal product of labor is diminishing the average product
of labor is also diminishing.

Part II (14 minutes)

Suppose the demand and supply equations for chocolates are given by:

		QD = 150 - P
		QS = 2P

where QD is the quantity of chocolates demanded and QS is the quantity of
chocolates supplied and P is the price of chocolates. 

(i) Find the market equilibrium price of chocolates and the quantity of
chocolates bought and sold.

Suppose the government has two goals:
	A. To reduce the number of chocolates consumed by the public.
	B. To increase government revenue.

Keeping these goals in mind answer the following:

(ii) The President proposes the imposition of a price ceiling of $75 on
chocolates. If you are a member of the congress how will you vote on this
bill? Why?

(iii) Now suppose that the government imposes a sales tax of $15 per unit.
Will this satisfy the two goals A and B; that is, will consumption of
chocolates decline? If so, by how much? If not, why not?  Will the
government collect any revenue from this market? If so, how much? If not,
why not?

(iv) With a sales tax, what is the distribution of the burden of the tax
between the consumers and the producers?