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Practice Exam 1 ECON 3550 / 5030


Please show all your work and explain your answers. Without an explanation for your answer, you will not receive credit. Clearly label all graphs for full credit and please write legibly.

A. True / False _____ 1. When the price of hamburger meat increases, the equilibrium price of hamburger buns increases.

_____ 2. If an individual is consuming two goods, X and Y, such that MRS >

PX (when good X is on the PY horizontal axis), then this person should consume less of good X and more of good Y in order to increase utility. Explain your answer both graphically and in words.

B. Essay and Problem Solving 3. Suppose the demand curve for a good is given by the following equation: P = 500 Q. The supply curve is given by: P = 100 + Q , where P measures the price of the good (measured in dollars per unit) and Q represents the quantity of the good (measured in units per week). a. Find the equilibrium price and quantity for this market. Graph demand and supply, noting the relevant intercepts and the equilibrium P and Q. (assume that partial units can be produced)

b. Suppose the government imposes an excise tax of $20 per unit on this good. Find the new equation for the supply curve, the new equilibrium quantity, the post-tax price received by sellers, and the post-tax price paid by consumers. Indicate your answers on the graph above.

c. What fraction of the economic burden of this tax is borne by consumers and what fraction is borne by sellers?

4. Jose has an income of $1,000. The price of good X is $50 and the price of good Y is $20. He initially maximizes his utility by consuming 10 units of good X and 25 units of good Y. a. Draw a graph showing his budget constraint and current indifference curve, with good X on the horizontal axis. Clearly label the intercepts and slope of his budget constraint.

b. Now suppose Joses income falls to $800. Assuming that good X is an inferior good, draw a new graph below that shows his original budget constraint and original indifference curve, as well as his new budget constraint and new indifference curve.

c. Draw Joses Engel curve for good X.

5. Draw possible indifference curves for the following scenario: Julie likes to eat ice cream and also likes to eat pickles, but she only likes pickles up to 10 pickles. After 10 pickles, she becomes indifferent to pickles (neither likes nor dislikes them). Draw an arrow to indicate the direction in which she has increasing utility across the indifference curves you have drawn.

6. Suppose that when the price of Good Z decreases, the quantity demanded of it increases. a. According to just the Substitution Effect of this price decrease, how does the quantity demanded of Good Z change?

b. Suppose that according to just the Income Effect of this price decrease, the quantity demanded of Good Z decreases. What type of good is this? Can it be a Giffen good? Why or why not?

7. The demand for Fayes Frames (a picture frame store) is the following: Q = 4000 100P (or P = 40 0.01Q). a. If the current price is $10 per picture frame, what is the point price elasticity of demand?

b. Does that make demand elastic or inelastic? Should Faye change her price if she is interested in maximizing total revenue? If so, then in which direction and why?