Exam 2 – Principles of Microeconomics
J. Wahl – Winter 2009
Please answer the italicized parts and take the rest of the question as given. Answer the
questions as fully and precisely as you can; I give partial credit. TURN OFF
ELECTRONIC DEVICES, PLEASE!
1. (12) T/F/U and explain. Suppose the people in our class consume only 2 goods, apples
and eggs. Apples cost $1 each and eggs cost $2 each. Although we each might make different
choices about the quantity of apples and eggs consumed, we would all have the same marginal
rates of substitution in equilibrium.
2. (12) T/F/U and explain. Giffen goods are inferior goods.
3 (14) Suppose you learn that you have been left a large inheritance by your wealthy aunt.
The inheritance will be placed in trust for you until you are 30 years old. What do you expect might
happen to your consumption today as a result? Please support your answer with a budget
constraint/indifference curve map.
4. (14) Servants are usually thought to be a luxury good – that is, as income rises by 1%, the
quantity of servants demanded rises by more than 1%. Income has been rising in the U.S. for the
last fifty years, yet over that time period the number of servants in the U.S. has dropped sharply.
Please explain this phenomenon as carefully and thoroughly as you can, using economic
concepts.
5. (14) Suppose that a state is considering a sales tax on food of 5%. At the end of the
year, all sales tax paid would be refunded to the consumers. Grocers are upset,
arguing that, if the tax is passed, groceries will cost more and people will buy less
food. State legislators and the governor reply that, because all the tax is rebated to
consumers who paid it in the first place, it will not influence food purchases. Who is
right? Explain, using graphs and economic concepts.
6. (14) You have a choice of buying a new textbook for $50 or a used text for $p. New,
unmarked texts give you extra pleasure (compared to marked-up, dogeared, and highlighted used
texts) equivalent to $10. You know that publishers bring out a new edition of this text every 2
years, so that you will be able to sell back the new text next year but you would get nothing for
the used text. If prices are rising at 3 percent per year, the interest rate is 10 percent, and
everyone expects these patterns to continue, what is the maximum p that booksellers could
charge for you to consider buying a used text? Please show your work.
7. (20) (Please note: This problem in no way implies an acceptance of
slavery. Economists have, however, found that the arbitrage principles we
discussed for financial markets applied quite well to slave markets. In fact,
slave markets operated in a fashion similar to the current markets for
professional ball players. Please, therefore, take the role I assign you in the
problem to discover yet another way that arbitrage might work.) You are going
to move to South Carolina for a three-year period, starting in 1840. You are planning on raising
tobacco, and you need some help. You have an offer from a neighbor, who will sell you a prime
fieldhand who will produce $100 net profit for you each of the three years, starting 1 year from
now. You estimate that you will be able to sell the fieldhand for $2000 at the end of the three
years. However, you must also take into account that he might not live through the entire three
