EEP1/Econ3
Midterm 2
1. (5pts) Give a definition:
a. Isoquant
b. Cost function
c. Revealed preference methods
d. Fixed cost
e. Hedonic method
2. (7pts)Draw a diagram using isocost lines and isoquants and use it to explain why a tax on
a polluting input is more expensive to a firm than a requirement to use less of the input.
Assume that requirement and the tax both lead to the same technique and the same
output. Follow these steps:
a. (1pt) Draw a diagram with an isoquant curve, an isocost line and a chosen input
bundle (technique).
b. (1pt) Why is the technique you marked chosen?
c. (1pt) Assume the input on the horizontal axis causes pollution and the government
restricts its use. Use your diagram to show what happens, output held constant.
Label your result.
d. (2pts) Now show how a tax can lead to the same result. Explain.
e. (2pts) Use your diagram to show which method costs the firm more. Explain
3. (4pts) Consider a price taking firm and explain:
a. Why p = mc(q) if q is positive
b. Why q =0 if p < minimum point of AVC
4. (4pts)The Jellybear problem from the homework. See the other side of this exam for
some of the relevant information. These questions pertain to that example.
a. You were provided with the population and distance for the towns that have
residents visiting Jellybear. What other information did you need to construct a
demand curve for visits. Now consider finding just one point on the demand
curve (for instance, the point where the admission fee is 2). How did you use the
information in the problem to find that point on the demand curve? Explain ALL
the steps.
b. Instead assume that you were a researcher and you did not know the relation
between visits per capita and costs. How would you find that relationship using a
revealed preference method? (Your answer does not need to include the details of
methods to fit lines to data points.)
2. The following table gives information on visitors to Jellybear Park:
City of Origin Population
Distance
Alabaster
1000
1
Beautiful
3000
3
Cornucopia
5000
5
Delight
7000
7
The travel cost per mile is $1.