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Economics 2002, Section A:
Intermediate Microeconomics I
Instructor: S. Dodds
MIDTE,RM (^) TEST, October 2L,
Instructions: (^) You have 80 minutes to complete this test. Be careful to budget
your time accordingly. All (^) answers should be written in ink in (^) the test booklets
provided.
StrCTION I: Tbue / False^ [10 marks]^ Answer 2 of the following 3 questions.
Each question is worth 5 marks. Explain whether the given statement is true, false
or uncertain. You will not receive anlr credit for an answer that does not include an
explanation.
- The consumer's surplus for a good (CS) is the same as the consumer's total
value (TV) for that good.
- The substitution effect causes people to buy more normal goods when their
income rises.
- If a consumer has an endowment of only good 1 and no good 2, she can still
consumeonly good 2 if she wants.
StrCTION (^) II: Short Question (^) [8 marks]^ Answer the following question.
Supposethat a consumerhas preferencesu(r1 , rz) : (^) r2-9-lt, where 12 rsincomeand
11 is pollution.^ Find the M RS formula for this consumer. AIso, find three bundles
on the indifference curve [ -^ 4 and draw the indifference curve on a diagram.
SECTION III: Short Problems 132 marks] (^) Choose2 of the following3 prob-
lems,and answerall sections.trach questionis worth 16 marks in total.
- Charlotte has dirninishirrg-MRS preferencesover cakes (rr) and a composite cornmodity
of all other goods ("r).She corrsidersbottr 11 and 12to be essentialgoods attd M:60.
[ rnarks] If p1 :2^ arrd r5:40, ]row many cakes (rj) is C]rarlotte corrsuming?
[8 rnarks] Suppose t]re goverrrrnent puts a $1 tax on every cake. Charlotte^ responds
to this new tax by (^) consurning 15 cakes. Find the riew ri and draw (^) an accurate
indifference / budget constraint diagrarn showirig the pre-tax and post-tax situations.
c. (^) [6 marks] What would Charlotte prefer: (^) the cake-tax, or an incorne-tax t]rat raises
the same revenue as the cake tax? Explain by drawing a new diagram.
- Ujjal has incorne IvI (^) , and preferencesover cokes:r1 arid pizza slices rl2 such that:
b.
u"(r1,rz) :^ rnin{2r1 ,1r2}.
[6 rnarks] Find Ujjal's demanrlfunctions: h(pr,pz, M)^ and,r2(pr,,pz,M).
[ rnarks] If Il'I :^ 30, pr : (^) $1 and p2 - (^) $2.50, find arrd show lJjjal's optimal choices
on an irrdiffererrce-curve / budget-constraint (^) diagram.
[ rnarks] If the price of cokes (pr) fullr, s]row using a diagrarn t]rat arry c]iange irr t]re
demarrd for cokes rnust be due to the incorne effect only.
- Chuck has arr income of M :^ I20 that he spends on pies (r1) and chickerrs(").Their
prices are p1 : (^) 2 and p2 :4. (^) His utilitv function is:
b.
u ( t t , T 2 ) :^ 2 r t (^) + 3 r z
[ rnarks] Firrd C]iuck's IUIRS and explain irr worcls his willingness to give up c]iickeris
in return for pies.
[7 rnarks] How rnany pies and c]rickens will^ C]ruck buy? Carefully explain your rea-
sorring. Show Chuck's detnarids on an indiffererice curve / budget constraimt diagram.
[ Inarks] Whic]r policy would Ctruck prefer: an in-kind transfer of 10 c]rickerrs.or a
$16 cash transfer? Explain your answer with a diagrarn.
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