ECO 220 – Intermediate Microeconomics

Professor Mike Rizzo

Practice Questions for First Midterm Exam

Assigned: Monday, February 28th

Review: Wednesday, March 2nd

1.  Would you expect the cross-price elasticity of demand between Coke and Pepsi to be larger or smaller than the cross-price elasticity of demand between coffee and tea? Why?

2.  Most empirical studies find that alcohol consumption is fairly sensitive to price. However, it appears that price sensitivities for beer are less than half of those for wine and other spirits.

  1. What is one reason why the demand for beer is more inelastic than the demand for other spirits?
  2. Why might the price elasticity of beer be much larger in the long-run than in the short-run?

3.  “I would much rather face an excise tax on cigarettes than a sales tax on cigarettes – that way, the convenience store has to pay for the tax and not me.” Comment.

4.  Suppose that your demand curve for bubble gum is given by the equation, where Q is the quantity of bubble gum demanded, P is the price of bubble gum, and k is a positive constant. Write the formula for your price elasticity of demand for bubble gum and solve it for a specific number.

5.  The demand curve for raisins is given by the equation Qd = 120 – 2P and the supply curve is given by Qs = -6 + P. What is the equilibrium price? ______What is the equilibrium quantity? ______Please graph these lines.

6. 

Jerk Chicken

b

r

w

Espresso

Answer the following questions based on the graph above.

Is espresso a normal good? yes / no Is jerk chicken a normal good? yes / no

Is espresso a giffen good? yes/no Does espresso obey the law of demand? yes / no

If the beginning point is w, the graph above illustrates the effect of

a)  an decrease in income

b)  an increase in the price of jerk chicken

c)  an increase in the price of espresso

d)  an increase in income

The income effect is from letter ______to letter ______.

The substitution effect is from letter ______to letter ______.

The total effect is from letter ______to letter ______.

7.  I drove to the store last night only to find on arrival that I had forgotten my wallet. I returned home frustrated and ready to veg out in front of the tv. Should I return to the store?

8.  The demand for apartments is P = 1200 – Q while the supply is P = Q units. The government imposes rent control at P = $300 / mo. Suppose demand grows in the market to P = 1400 – Q.

  1. How is the excess demand affected by the growth in demand for apartments?
  2. At what price would the government have to set the rent control to keep excess demand at the same level as prior to the growth in demand?

9.  From calculus class, you know that the derivative of ln X with respect to X = 1/X. Jack has one day to divide between studying and playing with his friends. t units of time studying will give him t points on his midterm exam. He will have s = 1 – t units of time to spend with his friends. His utility function over grades and time spent with friends is:

U(t,s) = t + a ln(s). Suppose we measure utility in “units of satisfaction.” So, if U = 1 he gets 1 unit of satisfaction.

  1. How much satisfaction does Jack get from each hour of studying?
  2. How much satisfaction does Jack get from each hour spent with friends?
  3. What is the marginal benefit of spending an additional hour studying?
  4. Write down Jack’s budget constraint.
  5. What is the “price” of studying?
  6. What is the “price” of time with friends?
  7. What is the marginal cost of spending an additional hour studying?
  8. Suppose a = ½ . If Jack is currently spending ¼ of his time with friends, would he be maximizing his utility? Why or why not?
  9. What percentage of his time should he spend studying to make himself as happy as possible?

10.  Why do the prices of some goods, like apples, go DOWN during the months of heaviest consumption while others, like beachfront cottages, go up?

11.  Jill’s internet café charges $30 for a discount card which allows customers to pay $2 per hour at the café. If a customer spends h hours, her total costs of h hours will be:

30 + 2h

Under this payment scheme, Charlie spends 10 hours at the café.

  1. Jill introduces a new scheme which charges $5 per hour of use without any minimum charge. Suppose further that Charlie’s income is y. Draw a picture of the budget constraints under the old and new schemes.
  2. Customers can choose between the old and new scheme. Which payment scheme should Charlie choose? Explain why this must be the case.

12.  Would it be rational for homo-economicus to vote in the next Presidential election?

13.  Why do most manual transmission cars have 5-forward speeds when most automatic transmission cars have only 4?

14.  You have just purchased a new Ford Taurus for $20,000, but the most you could get for it if you sold it privately is $15,000. Now you learn that Toyota is offering its Camry, which normally sells for $25,000, at a special sale price of $20,000. If you had known before buying the Taurus that you could buy a Camry at the same price, you would definitely have chosen the Camry.
True or False and Explain: From what we are told of your preferences, it follows that if you are a rational utility maximizer, you should definitely NOT sell the Taurus and buy the Camry.

15.  Economists like to use math and in some cases it is confusing. However, in this case, the use of mathematics illustrates an economic concept perfectly. What does the following expression mean in ECONOMICS terms?

A utility maximizing bundle of goods X and Y has been selected when MUX/PX = MUY/PY

16.  One objective of the food-stamp program is to alleviate hunger among poor people. Under the terms of the program, people whose incomes fall below a certain level are eligible to receive a specified quantity of food stamps. Stamps can only be used to purchase food. Further, a family may purchase additional food beyond what the stamps cover, but must do so at regular food prices. When would it be the case that the awarding of food-stamps to a poor family would make them equally well off to receiving a direct cash grant instead?

17.  Do you think a college education at Harvard has a high or low tuition elasticity of demand?

18.  What price maximizes total revenues along the demand curve P = 27 – Q2?

19.  When we see seemingly irrational behavior, instead of asking, “What social institutions led to this irrational behavior?”, I would encourage you to ask, “Why is this behavior rational?”

  1. Why do men spend less on medical care than women?
  2. Why do “they” sell tickets to a concert for $25 when they could sell out for $50?
  3. Why do seatbelts cause accidents?

20.  What did Adam Smith and others mean by the “labor theory of value?” What are these analyses missing when trying to understand the determination of prices?