Econ 301 Intermediate Microeconomics
Exam 1
You may use a calculator and the attached formula sheet on this exam. Write your answer on a
separate sheet of paper. Show all work for partial credit. You may not have enough time to finish
the exam — do as much as you can and keep in mind that exam scores will be curved.
1. Suppose a train carrying the fuselages of several Boeing 747 jets is derailed on a cliff and the
fuselages are badly damaged.
(a) (1 point) How will this affect the supply curve for 747s — will it shift to the left, right, or
not at all?
(b) (1 point) How will shis affect the demand curve for 747s?
(c) (1 point) Suppose that as a side effect of producing the engines for 747s using an advanced
smelting process, sulfur particulates are released into the air. The cost of this pollution
is $10, 000 per plane in the form of medical costs imposed on the people who breath the
polluted air and damage their lungs. How much is the optimal Pigouvian tax that forces
plane producers to take into account the costs of this pollution?
(d) (1 point) Is this pollution a positive or negative externality?
2. Consider demand for selfie-arms (a long arm with a button at the end that you attach to your
phone so that you can take selfies more easily). Suppose the demand curve is:
QD = 10, 000 − 5P − 0.5Pi + 2I
where Q is the number of selfie-arms demanded, P is the price in dollars of the selfie-arm, Pi
is the price in dollars of the iphone, and I is income in dollars. Suppose P = $20, Pi = $300,
and I = $1000. At these values, the demand for selfie-arms is QD = 11750.
(a) (2 points) Compute the price-elasticity of demand for the selfie-arm at the current price.
Is demand for the selfie-arm elastic or inelastic? Why?
(b) (2 points) Compute the income elasticity of demand for the selfie-arm at current income.
Is the selfie-arm an inferior good, a normal good, or a luxury good? Why?
(c) (2 points) Compute the cross-price elasticity of demand between the selfie-arm and iphones
at current prices. Are selfie-arms and iphones substitutes or complements? Why?
3. Consider the market for pianos. Suppose the inverse supply curve for pianos is
P (QS ) = 1000 + 0.2Q2
1
and the demand curve is
P (QD ) = 10, 000 − 0.1Q2
where Q is quantity of pianos and P is price of pianos in dollars.
(a) (2 points) Find the equilibrium price and quantity of the pianos.
(b) (4 points) Compute consumer and producer surplus.
(c) (2 points) Suppose a tax of $1000 is levied on the sale of pianos, paid for by the piano
sellers. Find the new equilibrium quantity, the price the consumers pay, and the price the
producers receive.
(d) (4 points) Compute consumer and producer surplus and government revenue under the
tax.
(e) (2 points) Compute deadweight loss under the tax.
4. Suppose that a college student, Dee, has the utility function:
U (X, Y ) = X 0.6 Y 0.4
where X is the number burritos consumed and Y is the number of hamburgers consumed.
Suppose the student’s income is I = $100, burritos cost PX = $6, and hamburgers cost PY = $5.
(a) (2 points) Find the optimal quantities of burritos and hamburgers that maximizes Dee’s
utility.
(b) (1 point) Suppose Dennis also eats burritos and hamburgers and buys them from the same
place that Dee does. What is Dennis’s marginal rate of substitution between burritos and
hamburgers?
0
= $5. Find Dee’s new optimal
(c) (2 points) Suppose that the price of burritos drops to PX
bundle of burritos and hamburgers.
(d) (1 point) What is Dee’s utility level at the new optimal bundle?
(e) (4 points) Using the old price for burritos, PX = $6, find the optimal bundle of burritos
and hamburgers that minimizes Dee’s expenditures while obtaining the utility level you
computed in the previous part.
(f) (2 points) Using the previous parts of this problem, compute the substitution effect and
income effect from a decrease in the price of burritos from $6 to $5.
(g) (1 point) Based on the last part, are burritos a normal or an inferior good?
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