Fall 2008 (Session I)
October 24, 2008
Microeconomics I: QUIZ
1. Multiple Choice: Choose the best answer. [4 points each]
1) If price is initially above the equilibrium level,
a) the supply curve will shift rightward.
b) the supply curve will shift leftward.
c) excess supply exists.
d) all firms can sell as much as they want.
2) If the demand function for orange juice is expressed as Q=2000 – 500P, where Q is
the quantity in gallons and P is dollar per gallon, then the demand for orange juice
has a unitary elasticity ( ε = −1 ) when price equals
a) $0.
b) $1.
c) $2.
d) $4.
3) If the utility for two goods “x” and “y” can be measured as U = x + y, then it can be
concluded that
a) “x” and “y” are perfect substitutes.
b) “x” and “y” are perfect complements.
c) “x” and “y” are both bads.
d) The indifference curves on the x, y graph will be upward sloping.
4) The below figure shows Larry’s indifference curves and budget lines for ham and
pork. Which of the following statements is TRUE?
a) Larry's demand curve for ham shifts leftward when his income increases.
b) Larry’s income elasticity of demand for pork is greater than zero.
c) Pork is a normal good for Larry.
d) All of the above.
Ham
Pork
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5) Suppose the quantity of x is measured on the horizontal axis and the quantity of y on
the vertical axis. If the price consumption curve is vertical when the price of x
changes, then the demand for x is
a) perfectly elastic.
b) perfectly inelastic.
c) unit elastic.
d) There is not enough information to determine the price elasticity of demand for
x.
6) Suppose that each worker must use only one shovel to dig a trench, and shovels are
useless by themselves. In the long run, the firm will experience
a) increasing returns to scale.
b) constant returns to scale.
c) decreasing returns to scale.
d) The returns to scale cannot be determined from the information provided.
2. True, False, or Uncertain: State whether the following statement is true, false, or
uncertain and explain why you think so. [8 points each]
1) Tom and Mary both purchase milk and cookies at the same Seven-Eleven. They
have different tastes for milk and cookies and different incomes. They both end up
purchasing some milk and some cookies, but they buy considerably different
amounts of the two goods. Therefore, we can conclude that they have the same
marginal rate of substitution of milk and cookies at their optimal consumption
bundles.
2) If Jeffrey’s Engel curve for beer is upward sloping and his indifference curves are
convex to the origin, his demand curve for beer must be downward sloping.
3) Decreasing returns to scale occur because of the law of diminishing marginal
returns.
3. Support for Day-Care Services
The government is considering two policies to support poor single mothers in raising
their children and you are supposed to present your view on which policy benefits the
single mothers the most based on the economic analysis. First policy is to offer them a
lower hourly rate for the use of day-care services and the other is to offer them a
lump-sum payment that allows them to consume the same amount of day-care services
as the first policy. Assuming that the costs of implementing these policies are the same
for the government, answer the following questions.
1) For a representative single mother, draw a diagram that indicates the optimal
consumption of the hours of day-care services used per day and all other goods
consumed per day and indicate it as E1. Assume that these goods are imperfect
substitutes. [5 points]
2) On the same diagram, indicate her optimal consumption under the first policy as E2.
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[8 points]
3) On the same diagram, indicate her optimal consumption under the second policy as
E3. [8 points]
4) Based on your analysis, which policy would you recommend to the government?
What are the potential difficulties in implementing this policy? [5 points]
5) Suppose that the representative single mother’s utility function is given by U =
Q0.4Y0.6, where U is the utility level, Q is the hours of day-care services used per day,
and Y is the units of all other goods consumed per day. If the use of day-care
services costs $10 per hour, all other goods costs $5 per unit, and the single mother
has the income of $100 per day, how many hours of day-care services will she use?
[6 points]
4. Hiring Professionals or Volunteers
A local non-profit group prints a weekly newsletter. Professional typists earn $10 per
hour and can type 2 pages per hour. Unpaid volunteers can type only 1 page per hour.
The newsletter is 10-pages long. Using the variables defined as below, answer the
following questions:
Hp: the hours of professional typist services,
Hv: the hours of unpaid volunteer typist services,
Q: the number of pages produced, and
C: the total cost.
1) Measuring Hp on the vertical axis and Hv on the horizontal axis, draw the relevant
isoquant and isocost curves. [8 points]
2) Give the equations for the isoquant ( Q ) and the isocost curves ( C ) in 1). [8 points]
3) If the group is to minimize the cost of producing the newsletter, where is the
optimum? Indicate it in the diagram as E. [4 points]
[End]
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