Intermediate Microeconomics

Intermediate MicroeconomicsSpring 2009, Karl StorchmannExam No. 1Instructions: Please read all the questions carefully. You have 80 minutes to complete the exam. You must answer all questions. The value of each question is indicated in parenthesis. The total maximum is 56 points. Answer each question as clearly and concisely as possible. Show your work but be brief. Good luck!Calculators allowed.

Real Price and Nominal Price (8 pts)

(1) The following Table provides you with the nominal price of watermelons from 1990 through 2007 (all in $/lb).

19901995200020052007

nominal price0.350.400.420.460.50

CPI (1990=1)11.121.161.201.20

CPI (2007=1)0.8330.9330.9671.001.00

real 2007 price0.420.430.430.460.50

Redefine the CPI (1990=1) as CPI (2007=1) and calculate the real price of watermelons for each year in 2007 prices.

Elasticity (14 pts)(2) The monthly supply of desktop computers is given by the equationQs = 15,000 + 43.75P. At a price of $800, what is the price elasticity of supply? (6 pts)

Answer:if P=800 ( Q=15,000+43.75*800 = 50,000E = b*(P/Q) = 43.75*(800/50,000) = 0.7

(3) Correct or false? Do not explain! (3 pts)(a) Substitutes have positive cross price elasticities. correct(b) The income elasticity of demand is defined as (%Income / %Price) wrong, it should be (%Quantity consumed/ %Income)(4) The logic of elasticity

(a) Karl always spends 13% of his income on wine regardless of what the price is. What is the income elasticity of his wine demand? (2 pts) EI=1

(b) The demand for Public Transit has a cross price elasticity of 0.03 with respect to gasoline prices. What is the percentage impact on ridership when the gasoline price increases by 10% (3 pts) if Pgas increases by 100%, transit ridership will increase by 0.03*100% or 3%. Thus, if Pgas increases by 10%, transit ridership will increase by 0.3%.

Consumer Behavior (22 pts)

(5) Assume you have a fixed budget of $100. Further assume that you spend your entire budget. Both good x and good y cost $10 each. You are consuming both goods where your MRS is equal to 0.8. (a) Are you optimizing your utility? Why or why not? (2 pts)(b) Draw a sketch and show the point of your consumption (3 pts)(c) What should you do? (1 pt)

Answer:

You are at point A. Here you (1) spend your entire income because you are on the budget line and (2) the MRS|SE|)- The effect of the income tax: only IE (- for normal, + for inferior good).

( quantity consumed may increase if the good is an inferior good (the two positive IEs must more than offset one negative SE) and will certainly increase if it is a Giffen good.

Taxes and Burden (7 pts)(9) Suppose the labor supply curve is given by Q=10 and the labor demand curve is given my Q=10-P. If congress imposed a tax of $1 per unit on the supply of labor

(a) what is total tax revenue? (4 pts)

(b) who pays how much of this revenue? (3 pts)

Since Q is a vertical line, at the equilibrium before tax quantity is Q=10 and P=0.Since Q is constant there will be a total tax revenue of 10, which is entirely borne by the supplier. That means he will incur a loss of $1 per unit.

(Alternatively, since the price is zero and he has to pay the tax, you may assume that the supplier shuts down. In this case tax revenue would be zero)U1

U2

y

x

A

B

U1

U2

y

x

A

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_1254736430.unknown

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