Midterm I
F 09
1. Define or explain in at most 2 lines:
a. Substitutes
b. Public good
c. Elasticity of demand
d. Pareto improvement
e. Externality
2. Suppose that a consumer buy bread and wine using her income. Use a budget constraint
and indifference curve diagram to find two points on a demand curve of bread. Explain
each step carefully. To complete this exercise assume that the price of wine is $1 and
income is $20. Be sure to label your pictures carefully and be sure to include
explanations for these questions:
a. What are the prices on the budget constraint you drew and why are those the
b. Why is the chosen bundle the bundle you have marked as opposed to some other
consumption bundle?
c. What price and quantity pairs are on your demand curve?
d. Using a new budget constraint indifference curve diagram show a budget
constraint for a good with a buy 4 get the rest at half price sale. Assume that
before the sale the consumer would buy 4 units. Will she buy more with the sale?
Why (use your diagram to make your argument)? This part of the problem does
not require you to choose actual numbers for the prices or income; it depends
upon the shape of the budget constraint.
3. Write a short (no more than1 or 2 bluebook pages) essay on this subject: The United
States was proactive in its policy towards rural America. Mention at least four types of
programs, with examples of each.
4. Agricultural support programs
a. Draw a picture and use it to explain the deficiency payment agricultural support
program. Be sure to show price to consumers and producers. Show the amount of
money the United States has to pay to purchase the commodity.
b. On a separate picture again show the deficiency payment program. Now add a
loan payment on to your graph, so both programs are used at once. Make the
target price greater than the loan rate. (Remember that both are denominated in
$/bushel) What is the price to the consumers? To the producers? How much grain
does the government purchase? Again show the amount of money the United
States has to pay to purchase the commodity. You may just clearly show your
answers on your picture.