Economics 2010 - Accelerated

Economics 2010 - Accelerated

Dr. Alston

Second Midterm

Fall Semester, 2002NAME______

1. Consider a consumer who each week purchases two goods, X and Y. The following table shows three different combinations of the two goods that lay on three different indifference curves, A, B, and C respectively:

a. In the grid space below, draw her implied indifference curves, with good X on the horizontal axis and good Y on the vertical axis. Label all curves and axes completely and accurately.

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b. In the space below, define the term marginal rate of substitution (MRS). On Curve A, what is the MRS between the first two combinations of goods X and Y (as shown in the second and third column of the table above)? Show your work.

c. Suppose this consumer has $500 available to spend on goods X and Y and that each costs $100. In the diagram grid provided in 1(a), draw her budget line. In the space below, determine the slope of the budget line (show your work and indicate the relevant price ratio that is involved) and briefly explain what the budget line shows.

d. What is the utility maximizing combination for this consumer (i.e., identify the combination at which she maximizes her satisfaction)? (Hint: All of the answers in this exercise occur at one of the combinations given in the table at the beginning of the problem.).

e. What is her marginal rate of substitution at the utility maximizing combination? Show your work and briefly explain how you arrived at your answer.

f. Now suppose the price of good X is cut to $50. Draw the new budget line in the grid provided in 1(a). Identify the point at which she now maximizes her satisfaction. How many units of goods X and Y will she consume?

g. What is her marginal rate of substitution at the utility maximizing combination in 1(f). Show your work and briefly explain how you arrived at your answer.

h. In the grid below, draw the demand curve implied for this consumer (you may assume the demand curve is linear over the relevant range of this example). Properly label your axes and demand curve.

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2. Suppose that you are a utility maximizer and so is your economics professor. Suppose, further, that this month you purchased 1 Famous Star Burger (they sell for $1.29 at Carl's Jr. on Harrison Blvd.) and 2 slices of Pizza-by-the-slice (cheese + 3 ingredients) pizza (sold for $2.58 at The Pie on Country Hills Drive above Harrison Blvd.), while your professor purchased 4 Famous Star Burgers, but only 1 slice of pizza. What can you conclude about your and his respective marginal rates of substitution for Famous Star Burgers and Pizza-by-the-slice? Explain. To get full points, use appropriate graph(s) to illustrate your explanation.

3. Using the three graph spaces below, illustrate the marginal decision rule (using appropriate marginal benefit and marginal cost curves) as it might be applied to the owners of a 30-acre farm on which slow race horses and tired polo ponies are retrained and sold or used as pleasure horses. In panel (a) show the net benefit and deadweight loss involved if the owners conduct the activity (e.g., riding horses if run as a hobby, training horses if run for a profit, minimizing taxes if run as a tax loss generator) at a level Qa per month which is below that which would maximize net benefit (i.e., Q* per month). In panel (b) show the net benefit and deadweight loss involved if the owners conduct the activity at the level that maximizes net benefit (Q* per month). In panel (c) show the net benefit and deadweight loss if the owners conduct the activity at a level (Qc per month ) above Q* per month. Label your axes and other parts of the graph accurately.

Panel (a)Panel (b)Panel (c)

4. Use the information in the first three columns of the table below about the input-output relationships involved in the production of toilet paper to complete the rest of that table and the table below it. Assume that the price of the variable input labor (L) is $20 and the price of the fixed factor of production is $5.

a. Use the graph panels below to graph the Total Product and Marginal Product Curves. Properly label your curves and axes. Indicate the point at which diminishing marginal returns first becomes apparent in both diagrams. (Remember to plot MP at its midpoint, as explained in the textbook and in class.)

b. Use the graph panel below, to graph the Total Variable Cost, Total Fixed Cost, and Total Cost curves. Properly label your curves and axes. Indicate the point at which diminishing marginal returns first becomes apparent.

c. Use the graph panel below to graph the AFC, AVC, ATC, and MC curves. Properly label your curves and axes. Indicate the point at which diminishing marginal returns first becomes apparent.