Economics 1 
                      1st Midterm Examination
                    Tuesday, February 21st  1995

Part I: (25 minutes)

Tell whether you agree, partly agree, or disagree and WHY with FIVE of the following six
statements.

1.   A decrease in the price of good A will have the effect of increasing real income and thus will
     lead to an outward shift in the demand curve for good A.

2.   By setting a high tuition and then offering scholarships to needy students, the University is
     able to charge each student the highest net price (tuition minus scholarship) that he/she is
     willing to pay.  Thus the University can extract all or most of their consumer surplus from its
     students.

3.   In his article, "Roofs or Ceilings," Milton Friedman recommends setting the ceiling price
     above the market equilibrium price so as to achieve the goals of rent control without its
     problems.

4.   A consumer maximizes satisfaction for a given income where her/his budget line is tangent to
     an indifference curve.

5.   A Giffen good is an inferior good, but an inferior good is not necessarily a Giffen good.

6.   A positive marginal cost means that, if output is increased, average cost will go up.

Part II (8 minutes)

Let Q(d,A) and Q(d,B) be the demand for beans in Atlanta and in Boston, respectively.  Let P
denote the price of beans.  We have Q(d,A) = 30 - 5P and Q(d,A) = 20 - 5P.

a) Is the demand for beans steeper in Boston or in Atlanta?  Explain.

b) Suppose that the price of beans increases from 2 to 3 dollars per pound, both in Atlanta and in
Boston.  Is the price elasticity of demand for beans higher in Boston or in Atlanta?  Explain.

c) Suppose that, because of a change in population tastes, the demand for beans in Boston
increases, and that the new demand is Q(d, B) = 25 - 5P.

Does your answer in (a) change?  Does your answer in (b) change?  Explain.


Part III (5 minutes)

Answer question 1 OR 2

1.   Let Q denote Quantity of output, TC total costs, TVC total variable costs, MC marginal
     costs, AVC average variable costs.

a) Fill in the table below
     Q    TC    MC  TVC  AVC

     0     2
     1     4
     2     5
     3    10
     4    18
     5    30

b) Are there any fixed costs?  Explain.

2.   Jane's world contains only two goods, bread and water.  The price of bread is PB and the
     price of water is PW.  Jane's income is $I.  Jane's preferences are such that the marginal
     utilities of both goods are diminishing.  If Jane's income were to increase, she would buy
     more of both goods.

1)   Draw a graph illustrating Jane's preferences across bread and water, the different
     combination of bread and water that she can purchase, and the particular combination she
     chooses to consume.  Clearly label the axes of your graph and any intercepts.

2)   How does Jane's consumption change if the price of water increases?  Illustrate and clearly
     distinguish the income effect and the substitution effect on your graph.