Econ 100a Perloff

First Midterm 1996

Instructions: 1) Put your name on the exam. 2) Put your TA's name and section on the exam. 3) Notice how many points each question is worth and allocate your time appropriately (DO NOT spend excessive time on the short-answer questions). 4) To get full credit on answers, you must be clear and rigorous. That is, you should use a graph for most problems, the graph should be clearly LABELLED, and you should interpret the answer in words as well. Be succinct. 5) You cannot get credit unless you write something down. Therefore, give partial answers if you cannot give complete answers. 6) In each section, answer only the number of questions specified -- You will not get extra credit for answering more than the specified number.

10 Point Questions: Each of these question is worth 10 points. Answer only 2 of the 3 questions in this section:

1. A doctor's group wants to ban foreign-trained doctors from practicing in the United States.

A. What would happen to the equilibrium quantity and price of doctor services in the United States? Use a graph to explain. (5 points)

B. How are American-trained doctors and American consumers affected? (5)

2. Helen spends all her money on food and clothing. When the price of clothing decreases, she buy more clothing. [Note: In the following questions, if the direction of the effect is ambiguous, say so.]

A. Does the substitution effect cause her to buy more or less clothing? Explain. (5)

B. Does the income effect cause her to buy more of less clothing? Explain. (5)

3. Suppose a firm has a fixed-proportions production function, where one unit of output is produced using one worker and two units of capital. If the firm has an extra worker and no more capital, it still can only produce one unit of output. Similarly, one more unit of capital does the firm no good.

A. Draw the q = 1 and q = 2 isoquants for this production function, where q is output. (5)

B. Draw the average product of labor and marginal product of labor curves for this production function. Assume the firm has four units of capital. (5)

15 Point Questions: Answer only 2 of the 3 questions in this section:

4. Explain why relatively more high-quality Washington-grown apples are sold in New Jersey (NJ) than in Washington. [That is, the ratio of high-quality to low-quality apples is higher in NJ than in Washington.] The cost of shipping to NJ is $1 per apple, regardless of quality.

5. Gerald spends $10 a week on meat (M) and vegetables (V). The price of each is $1 per pound. He buys 3 pounds of meat and 7 pounds of vegetables. The government is considering two types of taxes. It may set a specific tax of $1 per pound of meat or it may charge each consumer a lump-sum amount of $3 per week (regardless of what they consume). Which of these two taxes does Gerald prefer? Why? (10)

6. For a good Q, the supply function is p = Q + 10, and the demand function is p = 60 - Q. Using both math and illustrating your answer on a graph show the equilibrium quantity, the price the consumer pays, and (if it differs from the consumer price) the price producers receive if

A. There is no tax on this good. (6)

B. There is a 1/3=33% (ad valorem) sales tax on the price consumers pay. (9)

25 Point Questions: Answer only 2 of the 3 questions in this section.

7. Sarah is paid $5 per hour if she works 8 hours or less and is paid $10 an hour (the "overtime" wage) if she works more than 8 hours. Sarah maximizes her utility at either 6 or 12 hours of work.

A. Show in a graph why Sarah is indifferent between working 6 hours or 12 hours. (15)

B. If Sarah's overtime wage rises to $12 an hour, what can you say about how many hours Sarah wants to work? (10)

8. Steve's utility function is U = BC, where B = beer cans per week and C = pack of cigarettes per week. As a result, his marginal rate of substitution is MRS = -B/C, where beer is on the vertical axis and cigarettes are on the horizontal axis. Steve's income is $120, the price of a can of beer is $2 and that of a pack of cigarettes is $1. [In answering the following, use graphs and math.]

A. How many cans of beer and packs of cigarette does Steve consume? (12)

B. Due to a new tax, the price to Steve of a can of beer rises to $3. Now how much beer and how many packs of cigarettes does Steve consume? (13)

9. Bill has an income of $200. He may buy up to $100 worth of food stamps, where a food stamp can be used to purchase $1 worth of food costs him 25¢. [Assume there is no black market for food stamps.]

A. Under what conditions would he prefer receiving $75 cash instead of being able to buy up to $100 worth of food stamps? Explain using a graph. (15)

B. If Bill got $100 worth of food stamps for free (instead of having to buy them at a discount), would he be more or less likely to prefer in cash ($100) to food stamps than in (A)? (10)