Economics I

Spring 1998

First Midterm Exam--Make-up

Instructions:

Answer all sections of this test. This is a 60 minute exam (including 10 minutes for review).

Graphs are necessary where noted. In general, they are always helpful. Carefully label all graphs that you use.

Write all answers in the blue books provided. Show all work.

Write your name and your instructor's name in every blue book that you use.

This exam is given under the rules of the Penn Honor System.

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 (Total 24 points)

Answer the first question and five out of the remaining six. Explain whether the statement is True. False or Partially True. Your grade will be based on the quality of your explanation.

1. In the article, "Roofs and Ceilings," Milton Friedman suggests that government rent controls promote the construction of more urban dwellings.

2. In the short-run, a firm can vary all inputs.

3. An increase in the price of brownies will reduce the quantity of ice cream demanded, if brownies and ice cream are substitutes.

4. If the income effect is greater than the substitution effect then, as price increases, the quantity demanded will increase.

5. Marginal product equals average product if average product is at a maximum.

6. Even though a glass of diamonds is more expensive than a glass of water. the consumer surplus of a glass of water is greater than that of a glass of diamonds

7. A consumer consumes two goods, pizza and hoagies. If the price of pizza rises, the consumer will reach a new equilibrium only if the marginal utility of hoagies rises.

Part II ( 14 points)

Suppose that, irrespective of the prevailing prices, Mr. F spends 70% of his monthly income on food and the remainder on clothing. Keeping this in mind, answer the following questions:

a) (5 points) What is the price elasticity of demand for each good?

b) (5 points) Are food and clothes normal goods or inferior goods? Calculate their respective income elasticities.

c) (4 points) Are food and clothes substitutes? Calculate the cross elasticity of demand.

Part III (12 points)

The total product schedule of Rubber Duckies. Inc. a firm making rubber tub toys is described by the following

Suppose the price of labor is $400 a week. and total fixed costs are $100 a week.

(i) (4 points) Calculate total cost, total variable cost, and total fixed cost for the output levels shown above.

(ii) (4 points) Calculate average total costs, average variable costs. average fixed costs and marginal costs (fractions are okay).

(iii) (4 points) Why does average total cost initially decease and then increase as output increases?