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Midterm I
Economics 401
Assume throughout the exam that preferences are strictly monotonic and
strictly convex and that indifference curves are not kinked UNLESS the
question tells you otherwise.
A. -b
B. -A
C. Depends on the price
D. -A/b
3. [11] Ginger has an income of 100 which she can spend on food (F) or
shelter (S). She has utility function U = F3S2. Ginger's optimal
consumption of F is 10 units. What is the price of food?
A. 4
B. not enough information
C. 6
D. 10
4. [2.5] By selecting the bundle where MRS = MRT, the consumer is saying
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5. [2.5] Moving up an Engel curve, what is happening to prices?
A. decreasing
B. held constant
C. could be increasing, decreasing, or held constant
D. increasing
A. 120
B. 90
C. 60
D. 30
7.
$ per cup
[2.5] Todd’s daily demand curve for cups of coffee is shown in the
above figure. What is Todd’s marginal willingness to pay for his 4th
cup of coffee?
A. $4
B. $3
C. $2
D. $1
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9. [4.5] The figure below depicts various indifference curves for utility
over two bets A and B. (The indifference curves are the thick solid
black lines; the dashed line is the certainty line.) Which indifference
curve(s) is consistent with risk-loving preferences?
A A
I II
B B
A A
IV
III
B B
A. I and IV
B. III and IV
C. IV only
D. II and III
10. [4.5] If Bobby thinks that leisure is an inferior good, then his labor
supply curve is
11. [2.5] Some good must be normal, because otherwise preferences violate
which property?
A. more is better
B. strict convexity
C. transitivity
D. completeness
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12. [2.5] The marginal rate of transformation of y for x represents
13. [4.5] Suppose that 100 people were asked to imagine that they’d been
infected with a potentially fatal disease for which a costly cure
exists, and then asked how much they’d be willing to pay for the cure
above and beyond its market price in dollars. Their average answer was
$250,000. Economists refer to this monetary amount, $250,000, as:
14. [4.5] Between 1971 and 2006 the United States from time to time imposed
quotas or other restrictions on importing steel. Suppose both the
domestic and the foreign supply curves of steel for sale in the United
States are upward-sloping straight lines. What is the effect of a U.S.
quota on steel of Q*>0 on the equilibrium in the U.S. steel market?
16. [2.5] Assume the market for milk is competitive. The government has
decided to levy a $0.15 tax per gallon of milk. You, as an economist
(and a consumer of milk), get to decide whether the tax will be
collected from the producers or from the consumers. You
17. [11] Suppose that, in the U.S., the average marginal income tax rate,
t, is 20%. Then (1-t)/t = 4. What must be true about labor supply, for
an increase in the tax rate to mean an decrease in tax revenue?
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18. [2.5] Assume that for all consumers blue pencils and red pencils are
substitutes, and also normal goods. If the largest factory producing
red pencils is struck by lightning, decreasing the supply of red
pencils, the market equilibrium for blue pencils will
19. [4.5] According to the Wall Street Journal, a recent salary increase
for economics professors resulted from an outward shift in the demand
curve for academic economists due to the increased popularity of the
economics major, while the supply curve of Ph.D. economists did not
shift and the quantity supplied did not change. If we assume that more
people will decide to enter doctoral programs in economics as a result
of the higher salaries, how would such entry affect the long-run price
elasticity of supply?
20. [2.5] Suppose bet B pays 10% more in the good state and 10% less in the
bad state than bet A and both states are equally likely. Then it must
be the case that
21. [2.5] Which of the following is NOT indicative of strong market forces?
23. [4.5] Consumers will bear the full burden of a specific tax if:
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24. [2.5] Assume the demand curve for chips is downward sloping and the
supply curve for chips is upward sloping. If chips and salsa are
perfect complements, a decrease in the price of salsa will result in
25. [4.5] In 2006, the marginal tax rate on a single person making between
$30,651 and $74,200 was 25%. Suppose the elasticity of labor supply is
2 and suppose demand for labor is horizontal. The marginal tax rate can
then be increased up to 33.3% without decreasing tax revenues. Suppose
now that labor demand is downward sloping. How much can we increase the
marginal tax rate, without decreasing tax revenues, compared to the
case with horizontal labor demand?
26.
H
F
BL1
BL2
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27. [11] Rasheed has the utility function U(q1,q2)=q13q2. For p2=1 and a
utility level of 2, what is Rasheed’s compensated demand function for
q1?
A. (2/p1)(1/2)
B. (6/p1)(1/4)
C. 3/p1(1/2)
D. 3/(2p1)
28. [2.5] If Chauncey spends all his money on basketballs and sneakers, and
the price of sneakers increases, then what can you conclude about the
substitution and income effects for sneakers?
29. [7] Rodney has the utility function U=x1+2x2, and faces prices p1=1 and
p2=1. Which figure depicts his Engel curve for x1?
Y A. Y B.
x1 x1
Y Y D.
C.
x1 x1
A. A
B. B
C. C
D. D
30. [7] Suppose that a worker has the utility function U = YN, where Y is
income and N is leisure. If Y = wH and N = 24-H, where w = wage, what
is this worker’s labor supply function, H*? (Hint: Try writing the
utility function as a function of H only and then solving the problem.)
A. H* = 8
B. H* = 12
C. H* = 12w
D. H* = 8w
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31. [11] Suppose MARGINAL utility for good x is given by (x+a).5, where "a"
is a parameter. This implies
A. u*(p1+p2)
B. depends on whether p1>p2
C. (p1*u)(1/2)
D. p1*u
33. [2.5] Granny spends 75 percent of her budget on health care and 25
percent on food. If the prices of both goods rise, and Granny’s income
is adjusted using a fixed-weight index like the Consumer Price Index
(the weights equal her original budget shares), then after the price
change Granny is strictly better off
A. dollars
B. percent of GDP
C. elasticity
D. utils
35. [2.5] Suppose bet B pays 10% more in the good state and 10% less in the
bad state then bet A and both states are equally likely. Then it must
be the case that
A. Completeness
B. More is better
C. Transitivity
D. All of the above
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37. [2.5] Which of the following represents a true statement about the
compensated demand curve?
38. [2.5] In order to offset the harm to a consumer from a price increase,
we can give her an amount of money called Hicks compensation. What MUST
be true about this compensation?
40. [2.5] Gavin purchased a pair of vintage sneakers on WeeBay for $25. On
his first night wearing them out on the town, someone offered him $100
for the sneakers. Gavin refused. One can conclude that Gavin’s consumer
surplus from the sneakers is
41. [11] The demand for apples is given by QD=1-3p2-2pb+½Y, where p is the
price of apples, pb is the price of bananas, and Y is income. The
supply of apples is given by QS=5p–pb. By how much (approximately)
will the equilibrium price for apples increase with a $4 increase in
income if the current price of apples is $0.50?
A. 1
B. 2.5
C. 4
D. .25
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42. [7] The substitution elasticity of demand is the same for beans, rice,
meat, and wood. Which good is most likely to be a Giffen good?
Beans .1 -.5
Rice .2 -.5
Meat .1 1.6
Wood .2 -.2
A. beans
B. wood
C. meat
D. rice
43. [11] Suppose the demand curve for movie tickets has unitary price
elasticity and the supply curve is perfectly price elastic. If 2
million tickets are currently sold at a price of $5, how much tax
revenue could the government generate from a $0.50 specific tax?
A. $2 million
B. $0.9 million
C. $1 million
D. $2.5 million
44. [2.5] When Matthis got a promotion at work, his wage increased from $11
to $18/hour. He then decided to work only 38 hours per week, instead of
his usual 40 hours per week. What can we say about Matthis’s current
value of his leisure time?
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45. food
100
50 75 150 housing
[2.5] In the above figure, income is held constant, and three budget
lines and indifference curves are shown. If income is known, then you
could graph three points on the:
46. [2.5] Having strictly convex preferences implies that the absolute
value of the MRS of y for x
A. is decreasing as x increases.
B. is constant as x increases.
C. is increasing as x increases.
D. None of the above.
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47. y
D
B
[2.5] The following 2 questions concern the figure above. The line
drawn is a consumer's budget line for x and y. Which of the following
bundles is least expensive?
A. A
B. B
C. C
D. D
48. [2.5] Of the bundles A, B, and C in the figure above, which is the most
preferred?
A. A
B. B
C. C
D. not enough information
49. [2.5] In the figure above, if the consumer's optimal choce is the point
B, which of the following COULD be true about the MRS at the point B?
A. MRS = -1/2
B. MRS = -2
C. MRS = -4
D. none of the above
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50. y
A
10
10 x
A. MRS = -4
B. MRS = -1/2
C. MRS = -2
D. none of the above
51. [7] The following 2 questions concern Toby who has an income of 60 and
faces a price of 1 for good x and a price of 2 for good y.
A. x = 20, y = 40
B. x = 12, y = 24
C. x = 16, y = 22
D. x = 12, y = 6
52. [11] Now suppose Toby has utility function U = ln(x) + y. Now what is
Toby's optimal consumption bundle?
A. x = 2, y = 29
B. x = 24, y = 18
C. x = 20, y = 20
D. x = 10, y = 25
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53. [7] The next two questions concern Fred, a farmer who grows vegetables
on land that is close to a river. The river occasionally floods in the
spring with disastrous consequences. If there is no flood, the
production will be high and the vegetables will sell for $2500. If
there is flood, then what is left of the vegetables will be worth only
$100. Fred can buy flood insurance at a cost of $0.10 for each $1 worth
of coverage, i.e., if Fred buys ten units of insurance, he has to pay
$1 upfront and receives $10 if a flood occurs. Fred thinks that the
probability of a flood is 10%. Letting Y denote income, Fred's utility
function is U(Y)=Y(1/2).
A. $2240
B. $2260
C. $2290
D. None of the above
54. [11] At his optimal choice, how many units of insurance will Fred
purchase?
A. 2400
B. 2100
C. 2260
D. none of the above
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55.
U
U(W)
Bet A
Bet B
20 30 50 70 80 W
[2.5] The next two questions concern the diagram above, which shows a
utility function and two bets. Bet A pays $30 in state 1 and $70 in
state 2. Bet B pays $20 in state 1 and $80 in state 2. Both states are
equally likely.
It must be that
56. [4.5] Refer again to the figure above. Which of the following must be
FALSE?
57. [7] The following 2 questions concern Jackie, who has income Y, faces
prices p1 and p2, and has a Cobb-Douglas utility function:
U = q1a q2(1-a). Assume 0<a<1.
A. -((1-a)/a)(q2/q1)
B. -(a/(1-a))(q1/q2)
C. -(q1/q2)
D. -(a/(1-a))(q2/q1)
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58. [7] What is Jackie's optimal consumption of q2?
A. aY/p2
B. (1-a)Y/p2
C. aY/p1
D. (1-a)Y/p1
59. [7] Jen has a concave utility function U(W)=W(1/2). She faces a bet
that will pay either $400 or $144 with equal probability. Assume Jen
has no other wealth. She would be indifferent between this bet and a
certain payment of
A. $304
B. $272
C. $256
D. $288
60. [11] Jen has a concave utility function U(W)=W(1/2). She faces a bet
that will pay either $400 or $144 with equal probability. Her risk
premium for this bet is
A. $16
B. $32
C. $0
D. $64
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Answer Key for Test "Econ 401 W08 MT1.tst", 2/5/2008
No. in No. on
Q-Bank Test Correct Answer
1 1 1 A
5 10 2 D
2 6 3 C
2 3 4 B
3 3 5 B
3 12 6 B
4 12 7 C
4 3 8 B
5 18 9 C
4 17 10 C
3 7 11 A
2 2 12 D
4 13 13 C
1 5 14 D
4 14 15 B
1 8 16 D
4 8 17 C
1 9 18 C
1 6 19 B
5 4 20 D
1 2 21 B
3 6 22 C
1 7 23 A
1 3 24 C
4 10 25 C
2 8 26 C
3 11 27 B
3 4 28 D
3 13 29 D
4 7 30 B
5 11 31 C
4 15 32 A
3 5 33 B
4 11 34 A
5 3 35 C
2 1 36 B
3 9 37 A
4 2 38 C
5 5 39 C
4 1 40 C
1 11 41 D
3 15 42 D
1 13 43 B
4 5 44 A
3 1 45 A
2 4 46 A
2 9 47 C
2 10 48 D
2 12 49 D
2 11 50 B
2 13 51 B
2 14 52 A
5 13 53 B
5 14 54 A
5 16 55 D
5 17 56 C
2 15 57 D
2 16 58 B
5 8 59 C
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Answer Key for Test "Econ 401 W08 MT1.tst", 2/5/2008
No. in No. on
Q-Bank Test Correct Answer
5 9 60 A
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