Exam 3 study outline

This exam is comprehensive covering all units with a strong emphasis on the weeks since Exam 2. This exam is longer
than the other exams so plan to spend more time on it! It is 84 questions (previous exams were 60 questions) About 43
questions from week 12 and week 13. The rest are comprehensive questions from the other weeks. 

Below is a study guide for the 43 questions from week 12 and week 13 material. Review the previous week’s quizzes and
previous exam study guides to help prepare for the comprehensive portion of the exam.

There will be at least 1 or more questions on each of these points. So to focus your study time for Exam 2 make  sure
you are familiar with these (Hint - bolded points are especially important)

1.

S1 and D1 represent the current market supply and demand, respectively. D2 represents the social demand curve that
includes external benefits. What is the socially optimal level of output for this market?
2. The table below displays the private marginal benefit and the private marginal cost for Sarah's Power Plant.

Quantity (hours) MC Private MB Private

100 $500 $700
200 600 700
300 700 700
400 800 700
500 900 700

Sarah's Power Plant produces electricity. Every 100 hours of production produces $700 worth of kilowatt-hours (kWh)
per month. Sarah's Power Plant also produces air pollution increasing the health costs of local residents by $100 per
month.
What is the number of hours of production that Sarah will use to produce electricity if only the private costs and benefits
are considered?
3. Use the following table to answer the question below.

Units Consumed Total Utility Marginal Utility

0 0 —
1 W 20
2 35 X
3 Y 10
4 40 Z

The value for W is                               .

4. Assume that Alex would like to purchase a combination of product A and product B such that, after he is done
spending his limited income, the MUa/Pa = 8 and MUb/Pb = 4. To maximize utility without spending more money, Alex
should                               .

purchase less of product A and more of product B

 
  
purchase more of product A and less of product B
 
  
purchase more of both product A and product B
 
  
make no change in purchases of products A and B

 
5. A consumer has an income of $200, and the price of X is $10, while the price of Y is $20. If the consumer buys 2 units
of Y, then the maximum quantity of X that she could also buy is                               .
6. Which of the following indifference curves maximizes utility or satisfaction given the consumer’s budget line for Good
X and Good Y?
7. The graph below depicts two indifference curves for an individual consuming Good X and Good Y.

Compared to Bundle W, Bundle N generates                               .

  
less utility than Bundle W
 
  
more utility than Bundle W
 
  
the same utility as Bundle W
 
  
Cannot determine the preferences based on this information

 
8. Explain the relationship between total and marginal utility and complete the tables.

Units Total Marginal Units Marginal Total

0 0 ******** 0 ******* 0
1 10 1 12
2 18 2 10
3 24 3 8

9. You are choosing between two goods, X and Y, and your marginal utility from each is shown in the following
table. 
 
Units of X MUx Units of Y MUy
1 10 1 8
2 8 2 7
3 6 3 6
4 4 4 5
5 3 5 4
6 2 6 3
 
Instructions: Enter your answers as a whole number.
 
a. If your income is $9 and the prices of X and Y are $2 and $1, respectively, what quantities of each will you purchase to
maximize utility?
 
      units of X and   units of Y
 
b. What total utility will you realize? 
 
       utils
 
c. Assume that other things remain unchanged, and the price of X falls to $1. What quantities of X and Y will you now
purchase?
 
       units of X and   units of Y

10. Answer the question based on the following total utility data for products L and M. Assume that the prices of L and M
are $3 and $4, respectively, and that the consumer's income is $18
 
 Units of Units of Total
L Total Utility M Utility
1 9 1 16
2 15 2 28
3 18 3 36
4 20 4 40
5 21 5 42
 
What level of total utility does the rational consumer realize in equilibrium?
87 utils
104 utils
51 utils
58 utils
11. Use the following supply and demand graph to answer the question below.

S and DPrivate represent the current market supply and demand, respectively. DSocial represents the social demand curve that
includes external benefits.  What is the private market level of output?
What is the socially optimal level of output for this market?
12. Which of the following points shows the utility-maximizing bundle given the consumer’s budget line for Good X
and Good Y?
Things to review
-What is a positive externality? Are resources under-allocated or overallocated?
-What might government do to promote the consumption or production of a good that has a positive externality?
-What is a negative externality? Are resources under-allocated or overallocated?
-What might government do to fix a negative externality?
-Review the Coase theorem
-Review characteristics of public and private goods
-Review what utility is
-Review the law of diminishing marginal utility