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Economics 203: Intermediate Microeconomics I
Practice Midterm 1
Instructor: Paul Schure^1
Instructions:
- Make sure you write your name and student number at the top of this page.
- You have 50 minutes to complete the actual exam. In order to minimize distractions to others, you are not permitted to leave in the last 10 minutes of the exam. THIS EXAM IS LONGER THAN AN ACTUAL EXAM.
- You should answer all questions.
- Write your answers in the space provided. Use the backside of your exam for scrap paper if you wish, but only information written in the space provided will be considered for grading. You may also tear off the last page of the exam and use it for scrap paper.
- Use your time wisely. If you get stuck on a question move onto the next question and return if time permits.
- There are three sections to the exam:
Section A Consists of five multiple choice questions. Circle 1 (ONE) letter corresponding to the correct answer for each question. Make sure you answer choice is clearly indicated. You will receive five points for a correct answer, and zero for an incorrect answer. It is possible to get part markets if you clearly demonstrate some correct knowledge of the material.
Section B Consists 2 True/False/Uncertain statements. Make sure to justify your answer.
Section C Consists of two long problems of varying length.
(^1) Thanks to Dr Donna Feir for making the questions for this practice MT available.
SECTION A: MULTIPLE CHOICE
Section A: will consist of FIVE MC questions. Below are 11 example MC questions
- If the demand for widgets is inelastic, then when the price of widgets increases, revenues will: a. decrease b. remain the same c. increase d. increase, unless there are substitutes for widgets e. decrease because of the law of demand holds for widgets
2. Which of the following shifts the supply curve leftward?
a. An improvement in technology that decreases the cost of production.
b. An increase in the number of suppliers.
c. An anticipated drought that will make inputs more expensive.
d. A decrease in the wage rate.
- Diminishing marginal rate of substitution necessarily implies that the marginal rate of substitution a. falls as one travels down (eastward) along an indifference curve. b. falls as one travels up (westward) along an indifference curve. c. stays the same as one travels up (westward) along an indifference curve. d. decreases as the quantities of both goods increase. e. we get less utility when we have higher incomes
- Perfect complements will have indifference curves that are a. concave to the origin. b. vertical. c. straight lines. d. L-shaped. e. horizontal.
- If markets for some addictive drugs are found to have a higher price-elasticity of demand than was often thought, and if many addicts have difficulty holding down steady, well-paying jobs, we might speculate that the most likely reason for the surprising elasticity estimates is that a. the substitution effect is smaller than expected. b. the income effect is larger than expected. c. addictive drugs are inferior goods. d. the income and substitution effects work in opposite directions. e. Additive drugs are luxury goods.
- Paul likes two scoop of vanilla ice cream for every chocolate scoop. He gets no extra utility for an additional chocolate scoop if He doesnโt have two additional vanilla scoops and no extra utility for extra vanilla scoops without the appropriate amount of chocolate. His utility function can be represented by:
a. ๐๐(๐๐, ๐ฃ๐ฃ) = ๐๐ + 2๐ฃ๐ฃ
b. ๐ผ๐ผ(๐๐, ๐๐) = ๐ฆ๐ฆ๐ฆ๐ฆ๐ฆ๐ฆ{๐๐๐๐, ๐๐}
c. ๐๐(๐๐, ๐ฃ๐ฃ) = min{๐๐, 2๐ฃ๐ฃ}
d. ๐๐(๐๐, ๐ฃ๐ฃ) = 2๐๐ + ๐ฃ๐ฃ
e. ๐ด๐ด๐ด๐ด๐ด๐ด ๐๐๐๐ ๐ก๐กโ๐๐ ๐๐๐๐๐๐๐ฃ๐ฃ๐๐
11. Assume ๐๐(๐ฅ๐ฅ, ๐ฆ๐ฆ) = 4(๐ฅ๐ฅ๐ฆ๐ฆ)^0.^5 + 10. What is the Marginal Rate of Substitution of y for x
when x=2 and y=4?
a. 2
b. ยฝ
c. -
d. -1/
SECTION B: TWO TRUE/FALSE/UNCERTAIN statements. Justify why.
The total effect of a price increase on its demand is smaller than the substitution effect
1. The government puts a price ceiling on the cost of a large pizza. Consumers will loose
from this policy.
Uncertain- Assuming the pizza market is perfectly competitive, there will be deadweight
loss to society. As part of this deadweight loss there will be less pizza produced and the
pizza that is produced so some consumers could have benefited from the existence of
more pizza and would have been willing to pay amount producers would have accepted
to produce it. However, there is also a transfer from producerโs profits to consumers
relative to the perfectly competitive outcome (consumers pay a lower price on all units).
Whether consumers benefit depends on the size of the transfer and the size of the
deadweight loss. <alternatively, present two graphs, one in which the consumers win and
one where they loose surplus>
2. All goods, normal or inferior, satisfy the Law of Demand.
<smart start: start by explaining what is the Law of Demand. Only then answer the
question.> False โ Giffen good are special inferior goods. These Giffen goods do not
satisfy the law of demand.
Normal (because demand increases as income increases)
e. The price of ribs falls to 5$. Draw the income and substitution effects of this price change graphically. Assume ribs are on the horizontal axis.
f. What would Nadiaโs optimal bundle be if her utility function was given by ๐๐ = โ๐
๐
+ โ๐ถ๐ถ? Assume the price for a slab of ribs is $10 and $5 for chicken
โ๐๐๐๐
๐๐ ๐๐ ๐ช๐ช^
โ๏ฟฝ๐๐๐๐๏ฟฝ
๐๐ ๐๐ = ๐๐ โ
๐๐๐๐ = ๐๐๐๐๐น๐น + ๐๐(๐๐๐น๐น) โ ๐๐๐๐ = ๐๐๐๐๐น๐น โ ๐น๐นโ^ = ๐๐, ๐ช๐ช โ^ = ๐๐๐๐
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