Dr. H. Levine

 

Economics 1

1st Midterm Makeup  Exam

February 16, 1999

 

PART I.  35 minutes (5 minutes per question)

 

Answer question #1, and six (6) of the remaining questions for a total of seven (7) answers.  For each question, indicate whether you think the statement is true, false, or partly true and false, and WHY.

 

1.      The main theme of the article” Sex, Booze, and Drugs is whether college students under the age of 21, should be permitted to drink alcoholic beverages on campus.

   False – give credit if students discuss a major theme.

2.      A country can produce beyond its Production Possibilities Frontier by trading with other countries.

False-= A country can not produce beyond its Production Possibilities Frontier through trade, but it can consume beyond its PPF through trade. This can be illustrated by treating Nancy  and Tom (from) as individual countries

3.      If both demand and supply increase, then the quantity of the good at the new equilibrium must be greater than the quantity at the original equilibrium.

True. Student should use diagram to show that if both S &D shift to the right. The new Q1 will be greater than the original Q0

4.      Since tapes and walkmans are complements, their cross elasticity of demand is positive.

False- Cross-Elasticity of Demand of tapes and walkmans is negative. If price of walkmans rises , fewer workmans will be brought, and therefore, fewer tapes will be demanded.

5.      The output of a product is at its most efficient level where [MB-MC} is a maximum.

False- It’s where MB=MC. For full credit student must show why this so (if MB.MC, increase output; if MB<MC decrease output

6.      The Short Run supply curve for rental housing is positively sloped because as rents rise new buildings will be constructed.

False In short run time is too short for new building, but as rental prices rise more apartments from the existing stock of buildings will be offered for rent.

 

7.      If the Marginal Utility from a good diminishes rapidly, demand for the good is elastic.

False. It is inelastic. For  a small decrease  in quantity will be associated with a substantial decrease in marginal utility(levels of MU are associated with levels of price.)

 

8.      The equation of your budget line is F-=-6A+b (where F is Food on vertical axis) and A is Appliances (horizontal axis), and b is the vertical intercept). If the horizontal intercept is 10, and the money price of F is $2, then the level of your income is $20.00

False. If priced of F=$2, then price of A =$12(since slope equals (Price of A)/(Price of F), therefore, Income =$120= 12 times 10 (the horizontal intercept).

 

PART II. 15 minutes

 

Using budget lines and indifference curves, answer the following questions.  FULLY EXPLAIN YOUR DIAGRAMS.  Assume that you are rational.

 

1.      (7 minutes).  Using indifference Curves and any other analytical tools you think appropriate, derive a demand curve from one the two goods on the indifference curves. USE DIAGRAMS,CAREFULLY LABEL YOUR AXES AND CURVES AND CAREFULLY EXPLAIN YOUR ARGUMENT.

 

2.       (8 minutes). 

 

 

Quantity (per day)

Marginal Utility

 

Good A

Good B

1

21

24

2

18

20

3

15

16

4

12

12

5

9

8

6

6

4

 

a.      (5 minutes) The cash price of A is $3 and of B $4. If your income is $17 per day, how much of product A and B would you consume?

A=3 ; B=2 ( Key is MUa /Pa =MUb /Pb)  

 

b. ( 3 minutes) The prices of A and B remain the same as before. If your income rises to $38 per day, how much of each good would you consum.

     A= 6: B=5