Microeconomics I

Midterm 1 (test B)
Oct. 4 (Fri.)
10:10-11:40
Name: __________________
Student ID: ______________

A. Multiple Choices (40%)

1. Which of the following statements is a normative statement?
A) Minimum wage reduces employment.
B) Minimum wages causes surplus in labor market.
C) Minimum wage will improve the living of junior works more than senior workers.
D) Minimum wage should be welcomed by the low income class.
Answer: D

2. Suppose sugar and artificial sweeteners are perfect substitutes for Sam. Her indifference
curves for those two goods would be
A) downward-sloping and convex to the origin.
B) downward-sloping and straight lines.
C) L-shaped.
D) downward-sloping and concave to the origin.
Answer: B

3. For a given positively sloped supply curve, the price increase to consumers resulting from
a specific tax imposed on sellers will be
A) greater the more price elastic demand is.
B) greater the less price elastic demand is.
C) equal to the entire tax when demand is perfectly elastic.
D) equal to half of the tax whenever demand is unit elastic.
Answer: B

4. The rate at which a consumer must give up y to get one more x is equal to
A) -Px/Py.
B) -Py/Px.
C) -MUx/MUy.
D) MUy/MUx.
Answer: A

5. By selecting a bundle where MRS = MRT, the consumer is saying

A) "I value my last unit of each good equally."
B) "I am willing to trade one good for the other at the same rate that I am required to do so."
C) "I will equate the amounts spent on all goods consumed."
D) All of the above.
Answer: B

6. An optimum that occurs as a corner solution

A) includes only one good.
B) cannot be an equilibrium.
C) cannot exhaust the budget constraint.
D) includes the exact same amounts of each good.

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Answer: A

7.

The above figure shows the demand curve for crude oil. The demand curve has unitary price
elasticity when price equals (C)
A) $0.
B) $1.
C) $10.
D) $20.

8. Clifford lives by the motto "Eat, drink and be merry today, for tomorrow doesn't matter." If
today's consumption is measured on the horizontal axis and tomorrow's consumption is
measured on the vertical axis, Clifford's indifference curves
A) are horizontal straight lines.
B) are vertical straight lines.
C) show decreasing utility as one moves upward.
D) cannot be determined from the information given.
Answer: B

9. If the prices of both goods and income increase by the same percentage, what will happen
to the budget line?
A) The budget line rotates inward from the intercept on the axis of the good that did not
change in price.
B) The budget line rotates outward from the intercept on the axis of the good that did not
change in price.
C) The budget line shifts outward without a change in slope.
D) Nothing.
Answer: D

10. Supply curves

A) slope upward.
B) slope downward.
C) are horizontal.
D) can have many shapes.
Answer: D

11. Joe's budget constraint equals 500 = 2F + 100S, where $500 is Joe's income, $2 is the
price of food (F) and $100 is the price of shelter (S). How much food can Joe buy if he buys
one unit of shelter?
A) two units

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B) 200 units
C) 250 units
D) 400 units
Answer: B

12. If the demand for oranges is written as 𝑄 = 100 − 5𝑝, then the inverse demand function is
A) 𝑄 = 5𝑝 − 100.
B) 𝑄 = 20 − .2𝑝.
C) 𝑝 = 20 − 5𝑄.
D) 𝑝 = 20 − .2𝑄.
Answer: D

13. When two goods are substitutes, a shock that raises the price of one good causes the price
of the other good to
A) remain unchanged.
B) decrease.
C) increase.
D) change in an unpredictable manner.
Answer: C

14. If a good has an income elasticity of demand greater than one, one might classify that
good as
A) a necessity.
B) a luxury.
C) unusual.
D) inelastic.
Answer: B

15. The demand curve for Widgets is given by 𝑄 𝑑 = 6000 − 2𝑦 − 200𝑝 + 30𝑝𝐺 , where 𝑄 𝑑
is the quantity of widgets demanded, y is the per capita income and 𝑝𝐺 is the price of Gizmos.
An increase in per capita income will cause
A) demand shifts left.
B) demand shifts right.
C) demand increases.
D) movement along the demand curve.
Answer: A

16. Suppose a market were currently at equilibrium. A rightward shift of the supply curve
would cause a(n)
A) increase in price but a decrease in quantity.
B) decrease in price but an increase in quantity.
C) increase in both price and quantity.
D) decrease in both price and quantity.
Answer: B

17. Suppose the demand for Digital Video Recorders (DVRs) is given by 𝑄 = 250 −
0.25𝑝 + 4𝑝𝑐 , where 𝑄 is the quantity of DVRs demanded (in 1000s), 𝑝 is the price of a DVR,
and 𝑝𝑐 is the price of cable television. How much does the quantity demanded for DVRs
change if the 𝑝 rises by $40?
A) drops by 10,000 DVRs

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B) increases by 16,000 DVRs
C) drops by 2,500 DVRs
D) increases by 4,000 DVRs
Answer: A

18. If two indifference curves were to intersect at a point, this would violate the assumption
of
A) transitivity.
B) completeness.
C) Both A and B above.
D) None of the above.
Answer: A

19. Microeconomics studies the allocation of

A) decision makers.
B) scarce resources.
C) models.
D) unlimited resources.
Answer: B

20. Which of the following utility function does not have convex indifference curves?
A) Cobb-Douglas
B) Constant elasticity of substitution
C) Linear
D) Quasilinear
Answer: C

B. Analytical Problems (40%)

1. Suppose the market for grass seed can be expressed as:

Demand: 𝑄 𝑑 = 100 − 2𝑝
Supply: 𝑄 𝑠 = 3𝑝
If government imposes a $5 specific tax to be collected from sellers,
a. what is the price consumers will pay? (3 pts)
b. How much tax revenue is collected? (3 pts)
c. What fraction is paid by consumers and what fraction is paid by sellers? (6 pts)

Answer: At equilibrium without the tax, p = 20 and Q = 60. In addition to receiving their
𝑄
price, sellers must also receive $5 per unit. Rearranging the supply curve yields 𝑝 = 3 ;
𝑄
adding the tax yields 𝑝 = + 5. Substituting this into the demand curve yields 𝑄 = 100 −
3
𝑄 2 5
2 ( 3 + 5) = 90 − 3 𝑄 or 3 𝑄 = 90. Solving yields Q = 54. Substituting into either demand
curve or supply curve plus tax yields p = 23. Tax revenue = 5 ∗ 54 = 270. Since price rose $3
on a $5 tax, consumers pay 3/5 of the tax or 162, and sellers pay 2/5 of the tax.

2. Suppose that the current price of oil is $60 per barrel and the quantity sold is 90 million
barrels per day. The current estimates of the price elasticity of supply and demand are η = 1
and ε = -.2 respectively.
a. Compute linear equations for the supply and demand. (6 pts)
b. What will be the effects on the market price and quantity if the U.S. government
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 suddenly decides to purchase an additional 2 million barrels of oil? What is the new
equilibrium? Assume that the addition consumption of oil by the government results in a
parallel shift of the supply curve to the left by 2 million barrels per day. (4 pts)

Answer:
a. Because η = 1 the supply goes through the origin. The slope is
1 = d(60/90) d = 3/2. Qs = 1.5p
Slope of demand:
-0.2 = -b(60/90) b = 0.3 Qd = a - 0.3p
90 = a - .3(60) a = 108
Qd = 108 - 0.3p
b. The new supply becomes Qs = 1.5p - 2
1.5p - 2 = 108 - 0.3p
1.8p = 110
p = 61.11
Q = 89.67

3. Suppose Jerry's utility depends on the amount of time spent watching cartoons (x) and the
amount of time reading comics (y), and his utility function is
𝑈(𝑥, 𝑦) = 4𝑥 0.3 𝑦 0.7
He has 20 hours of free time to spend on these two activities each week, and his goal is to
maximize his utility.
a. Set up the Lagrangian for this constrained maximization problem. (4 pts)
b. What is the optimal amount of time spent watching cartoons and reading comics each
week? (6 pts)

Answer:
a. 𝐿 = 4𝑥 0.3 𝑦 0.7 + 𝜆(20 − 𝑥 − 𝑦)
b. The optimality conditions are
𝐿𝑥 = 1.2𝑥 −0.7 𝑦 0.7 − 𝜆 = 0
𝐿𝑦 = 2.8𝑥 0.3 𝑦 −0.3 − 𝜆 = 0
𝐿𝜆 = 20 − 𝑥 − 𝑦 = 0
First solve for the MRS = MRT condition using the first two conditions above:
1.2𝑥 −0.7 𝑦 0.7 3𝑦
= 7𝑥 = 1
2.8𝑥 0.3 𝑦 −0.3
3
or simply 3𝑦 = 7𝑥, 𝑥 = 7 𝑥 ,Substitute this into the budget constraint
10
𝑦 = 20
7
So y = 14 and x = 6. Paul will spend 6 hours on watching cartoons and 14 hours reading
comics.

4. Joe subscribes to an Internet provider that charges $2 per hour. He has $100 per month to
spend and is at equilibrium by buying 10 hours of Internet access and $80 worth of other
goods. Draw the indifference curve and budget line. If the company switches to a $20
monthly fee for unlimited Internet access, is Joe better off? (8 pts)
Answer:

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See the above figure. Under the new plan Joe can still purchase his original bundle and get
additional time on the Internet for free. Note that had Joe been consuming less than 10 hours
at $2 per hour, the new pricing policy would leave him worse off.

C. Short Answer Problems (20%, 5 points each)

1. Explain what is market clearing price.

Answer: At the equilibrium price, sellers want to sell the exact amount consumers want to
buy. There is no excess demand or excess supply. The market is exactly cleared of all goods.
(只要寫 quantity demand=quantity supply 就給滿分)

2. What is sales tax and what is ad valorem tax?

Ans:
Sales tax : Taxes imposed by the government on the sales of goods, including ad valorem tax
and unit tax.
Ad valorem tax : The government collects a specific amount, t, per unit of output.

3. Compute the MRS for the following utility functions:

a. 𝑈(𝑋, 𝑌) = 𝑎𝑙𝑛(𝑋) + 𝑏𝑙𝑛(𝑌),
b. 𝑈(𝑋, 𝑌) = 𝑎𝑋 + 𝑏𝑌, where a and b are strictly positive constants.

Answer:
𝑎 𝑏 𝑀𝑈 𝑎𝑌
a. 𝑀𝑈𝑋 = 𝑋 , 𝑀𝑈𝑌 = 𝑌 thus 𝑀𝑅𝑆 = 𝑀𝑈𝑋 = − 𝑏𝑋.
𝑌
𝑀𝑈𝑋 𝑎
b. 𝑀𝑈𝑋 = 𝑎 , 𝑀𝑈𝑌 = 𝑏 thus 𝑀𝑅𝑆 = = − 𝑏 ..
𝑀𝑈𝑌

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Detailed Solutions for Part B and (

1s 01
&

pd pd
lado
& 10 &

!
10 =

!
=
i
- -

inverse form P =
@ a + + er
Pi
+aX
=
q + i

pre-tax equilibrium at + er tax

St
P S
pd = p pd = p't
10 -
+ a =
9 10 -
+ a =
q + i

= a *
= a +

·
= 50 ,
0 = 60 = 45 , a + = 54
*
p = 20 PD + yer = 2)
Pseller = 18
.
b tax revenue = & +
+ = w = + 154) = 278

10018
c. Fraction paid by sellers =
5
=
F 1460
Q
D
1) -
10 3
buyers = =
5 F
 I
130
d
60 b & = 108 -
0 3p
9 .
IP > = Current price = , Q = Current quantity = 90 .
.

Let : ad = a + bp
d a = 1 . 5p -
2

a = c + eps in equilibrium :

-
Tip1.a, ) = 1 dadd
=
dPS
ad = as
108 Sp
do
-
0 .
= 1 . 5p -
2
:.

P=
:. 110 = 1 .
8p .

-
3,p .
a , )
= -0 .
1 = daddad odd
d pd

: dad - .

&
then ad = a -0 Sp
.
pass through IPC = current price = 60
, @c = current quantity = 90
·
a = c +
+p
d
: 90 = a -0 . 4100)
, a = 108 & = 108 -
0 . 3p

>
+1001
-

90 = c + .
c = 0 a = 1 . 5 p
(S011) (S012)
* " * .
Max yo yo
.

U =
4X Max U =
4X
b .

Sit X +
y
=
10 Sit X +
y
=
10

3yo . MUY =2
*

a L =
4x + x(20 -
x -

y) b
1x MRS = =
MRT =
1 =
by
=
1x
=
by =

F ,
0, C => X = Y
= x=
74
= 1 2
x*yo -
X =
0 -
&
$ 20-Ey-y 2y +
y =
10 i
y 14 x= 6
Bring
.
=
,
into :
=

%Y 3y0 3
*

*6 *
.
=
2, 84 x
=
0 -
y 14
-

in x ,

Y = 20 -

X-y -
=
Other
goods
100 -

88 new
budget constraint

·
---

>
-
original budget constraint

Internet access
50
Because Joe can still purchase his original bundle of goods but
get unlimited internet access in new
pricing policy
so the new
pricing policy is better off for Joe.