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Econ 520 Intermediate Microeconomics
Instructor Leilei Shen
Length: 90 minutes
Midterm 1 (Total 50 points)
Multiple Choice. Circle your choice for the best answer. (2 points each)
1) A Rolling Stones song goes: "You can't always get what you want." This echoes an
important theme from microeconomics. Which of the following statements is the best example
of this theme?
A) Consumers must make the best purchasing decisions they can, given their limited incomes.
B) Workers do not have as much leisure as they would like, given their wages and working
C) Workers in planned economies, such as North Korea, do not have much choice over jobs.
D) Firms in market economies have limited financial resources.
2. Since last year, the price of gold has risen from $120 to $420. What annual inflation rate
would leave the real price of gold unchanged over the last twelve months?
A) Approximately 29%
C) Approximately 71%
E) none of the above
3. Due to the recent increase in the price of natural gas, the quantity of coal demanded by electric
power generation plants has increased. Based on this information, coal and natural gas are:
C) independent goods.
D) none of the above
4. Use the following two statements to answer this question:
I. The price elasticity of demand is constant along the entire length of a linear demand curve.
II. The price elasticity of demand is the special name that economists give to the slope of a
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) I and II are false.
5. Assume that beer is a Giffen good. If the price of beer falls, then the substitution effect results
in the person buying __________ of the good and the income effect results in the person buying
__________ of the good.
A) more, more
B) more, less
C) less, more
D) less, less
6. The endpoints (horizontal and vertical intercepts) of the budget line:
A) measure its slope.
B) measure the rate at which one good can be substituted for another.
C) measure the rate at which a consumer is willing to trade one good for another.
D) represent the quantity of each good that could be purchased if all of the budget were allocated
to that good.
E) indicate the highest level of satisfaction the consumer can achieve.
7. A consumer maximizes satisfaction at the point where his valuation of good X, measured as
the amount of good Y he would willingly give up to obtain an additional unit of X, equals:
A) the magnitude of the slope of the indifference curve through that point.
B) one over the magnitude of the slope of the indifference curve through that point.
8. A curve that represents all combinations of market baskets that provide the same level of
utility to a consumer is called:
A) a budget line.
B) an isoquant.
C) an indifference curve.
D) a demand curve.
E) none of the above
9. The curve in the diagram below is called:
A) the price-consumption curve.
B) the demand curve.
C) the income-consumption curve.
D) the Engel curve.
E) none of the above
10. Suppose that a consumer regards two types of soap as perfect substitutes for one another.
The price consumption path generated by changing the price of one type of soap
A) is always upward sloping.
B) is always horizontal.
C) is always vertical.
D) corresponds with the axis for the cheaper soap.
E) corresponds with the axis for the more expensive soap.
Short Answers. Write your answer in the space provided below/
1. (Total 10 points) The wheat market is perfectly competitive, and the market supply and
demand curves are given by the following equations;
Q D = 100 - 6P
Q S = 50 + 4P
where Q D and Q S are quantity demanded and quantity supplied, respectively.
a. Determine the equilibrium price and quantity. (2 pt)
b. Determine the consumer surplus at the equilibrium price and quantity. (2 pt)
c. Determine the price elasticity of demand at the equilibrium price and quantity. Is this
elastic, inelastic, or unit elastic? (2 pt)
d. Suppose the government provides wheat farmers with a subsidy of $1 per unit. How does
this change the market supply? What is the new market equilibrium? What is the total
government expenditure required to support this program? (4 pt)
2. (Total 8 points) Mikey is very picky and insists that his mom make his breakfast with certain
fixed proportions of cereal and apple juice, any other combination and it ends up on the floor.
Cereal costs 4 cents per tablespoon and apple juice costs 6 cents per tablespoon. If Mikey's
mom budgets $8 (800 cents) per month for Mikey's breakfast.
a. How much cereal and juice should mom buy if Mikey insists that his breakfast contain 3
tablespoon of cereals and 2 tablespoon of apple juice?
b. If now cereal costs 8 cents per tablespoon and Mikey?s preference remains the same, how
much cereal and juice should mom buy? (2 pt)
c. Show part a) and b) in a diagram. Cereal should be on the X-axis, and apple juice on the
Y-axis. Label the appropriate budget lines, indifference curves, and utility maximizing
consumption of cereals and apple juices for Mikey. (4 pt)
(Total 12 points) Donald derives utility from only two goods, food (F) and clothing (C). His
utility function is as follows:
MU F = 4C
MU C = 4F
Donald has an income of $200, the price of food is $2 and the price of clothing is $4.
a. Express the budget equation mathematically. (1 pt)
b. What quantities of food and clothing will maximize Donald?s utility? (2 pt)
c. Suppose the government now provides a $1 subsidy on food. How will this alter
Donald?s utility maximizing basket of goods? Show your results on a diagram, with food
on the X-axis, and clothing on the Y-axis. Lable the budget lines, indifference curves,
income and substitution effects. Is food a normal or an inferior good. (5 pt)
d. Suppose, instead of the per unit subsidy in part c), a lump sum tax rebate of the same
dollar amount is provided to Donald. What is Donald?s utility maximizing basket of
goods? (2 pt)
e. The government expenditure under c) and d) cost exactly the same amount, which of the
two programs would Donald prefer? Show your answer numerically and explain why
Donald prefers the per-unit subsidy over the lump sum tax rebate, or vice versa, or why
he is indifferent between the two. (2 pt)
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