Economics 1 
                1st Midterm Examination - MAKEUP
                    Wednesday, March 1, 1995

Part I: (25 minutes)

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

1.   If demand for a good is elastic, people will spend more for it when its price increases.

2.   Before a flood, boats were cheap but scarce; after a flood they were plentiful but
     expensive.  This shows that boats are unusual because their demand curve has a
     positive slope.

3.   Complementary goods have negative cross-elasticities of demand.

4.   A consumer minimizes cost for a given level of satisfaction, where the ratio of the
     marginal utilities of the two goods is equal to the ratio of their prices.

5.   The Law of Diminishing Marginal Product says that by increasing the variable factor
     beyond a certain level, we get decreasing increases in total output.

6.   The marginal product curve always intersects the average product curve at the 
     maximum point of average product.

Part II (15 minutes)

Consider the demand and the supply of apartments in Morgantown, W.V. (Assume that all
apartments are of equal quality.) 
                     Q(d) = 30
                     Q(s) = 5 + R
               
where R denotes the monthly rent of apartments and Qd and Qs the monthly demand and
supply of apartments.

a)   Draw the demand and supply of apartments (Label your axes).

b)   What is the equilibrium quantity and rent?  Show your work.

c)   Suppose the local authorities of Morgantown put a rent ceiling equal to R = 30.  How
     does your answer to b) change?

d)   Suppose that instead the ceiling is R = 20.  How does your answer to b) change?

e)   Would you expect the ceiling to have stronger effect in the presence of a steeper supply
     curve?  Explain your answer.

Part III ( 10 minutes)



Suppose a household spends all its income (I) on food (F) and clothing (C).  Let A be the
initial equilibrium and let B the new equilibrium, after the price of food (P(F)) has decreased.

a)   Carefully illustrate on the graph above the income and the substitution effect.

b)   Is food a normal or an inferior good?  Why?

c)   Is clothing a normal or inferior good?  Why?

d)   From the diagram could food and clothing be complements?  Explain.