Professor Peter BerckGSI: Xi Lu and Deirdre Sutula

Envecon 1 and Econ c3: Quiz 1. 2014

1. Give a short definition of
2. Elasticity of demand (1 point)
3. Pareto Optimal (1 point)
4. Inferior good (1 point)
5. Open access (1 point)
6. Total willingness to pay (1 point)
7. Draw a diagram with two budget constraints that differ only in the price of the good on the horizontal axis. Call this good on the horizontal axis bread. Label your axes.
8. Now draw two indifference curves that allow you to find the consumer’s chosen bundles for each of the two prices. Mark these bundles. (3 points)
9. Draw one more line on your diagram and use it to carefully explain the equivalent variation for the price change described above. (2 points)
10. Three people share a kitchen. When 1 hour of work is expended on the kitchen it is clean and otherwise it is dirty. (It does not have a half clean state.) Each of the three people is willing to work ¾ of an hour to have the kitchen clean.
11. Explain how the three people could end up with a dirty kitchen (2points)
12. Explain how they could end up with a clean kitchen. (2 points)
13. Explain how any two of them cleaning the kitchen would produce a Pareto Optimum. Do you think this is fair? explain. (1 point)
14. Draw a supply and demand diagram with a flat supply curve and a downward sloping demand curve. Label the equilibrium price and quantity. Now consider a specific subsidy, that is, the government pays the producers a fixed amount of money per unit in addition to what they receive from consumers.
15. On your diagram, show how the price paid by consumers and price received by producers changes if the government subsidizes the good. Explain all curves on your diagram. (3 points)
16. How much did consumer surplus change between the original equilibrium and the new subsidized equilibrium? Show the amount as an area on your diagram and provide a brief explanation. (2 points)