Economics 1
1st Midterm - Makeup
Spring 1996


Instructions:
1.	Answer all sections of this test.
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 (6 minutes)

State whether you agree or disagree with the following statement, and
explain why.

E. C. Burks, in his article "Fare Rise Hit Buses Harder than Subway,
M.T.A. Says," indicates that the demand for buses is less inelastic than
the demand for subways because buses travel on the surface of the ground
and subways travel below.

PART II (24 minutes; 4 minutes each part)

State whether you agree or disagree with the following statement, and
explain why.

1.	The income elasticity of demand for an inferior good is negative.

2.	If goods A and B are complements, the substitution effect of a
fall in the price of A will be to increase the demand for B.

3. 	If there are only two goods, they cannot both be inferior goods.

4.	One of the ways an economy can move from a point within its PPF to
a point on the frontier is to devote increased resources to research and
development so as to improve the level of technology available in the economy.

5.	If good A is a normal good with a price elasticity of demand less
than 1, then an increase in income will lead to an increase in the total
expenditure on good A.

6.	If the demand curve for good A has a positive slope, A must be an
inferior good.

PART III (15 minutes)
Robert buys tea and coffee each week from a nearby grocery store. His
demand for tea (T) is given by
and his demand for coffee (C) is given by
Here, E, PT and PC denote Robert's income, the price of tea and the price
of coffee, respectively.

1.	Suppose Robert earns $100, the price of tea is $1 and the price of
coffee is $2. How much coffee and tea does Robert buy?

2.	Is tea a normal good for Robert? Is coffee?

3.	Suppose the price of tea rises to $2, with Robert's income and the
price of coffee unchanged. Calculate the new demand for tea and coffee.

4.	Use a diagram to show the income and (cross) substitution effects
on the demand for coffee due to an increase in the price of tea.

PART IV (15 minutes)
Food is a necessity. Suppose that the demand for food is given by
1.	How are equilibrium price and quantity determined?

2.	What is the price elasticity of demand for food?

3.	Suppose the equilibrium price of food is $5 and that the
elasticity of supply of food is always 1. Write down an equation for the
supply function or draw its graph.

4.	What is revenue at a price of $5? Can the suppliers raise their
revenue in this market?  If so, how and why?

5.	What is consumer surplus at a price of $5?

6.	Suppose the supply curve shifts to the right due to an improvement
in the technology of food production. What will happen to the equilibrium
price and quantity?