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Name ________________________________

 


 

WID _________________________________

 


 

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: &quot;You can't always get what you want.&quot; 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

 

conditions.

 

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%

 

B) 40%

 

C) Approximately 71%

 

D) 250%

 

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:

 

A) complements.

 

B) substitutes.

 

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

 

demand curve.

 

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.

 

C) Px/Py

 

D) Py/Px

 

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:

 

U(F,C)= 4FC

 

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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