Economics 101 Section 01
Fall Semester 2009
PRACTICE Midterm 1
October 1, 2009 9:10-10:10 AM
Name:
.
For full credit, graphs must be completely LABELED and math work
shown.
Be sure to justify your answers clearly and precisely for full credit, even if
question does not explicitly ask for justification.
Each page may have has its own directions. Follow the directions carefully.
The value of the problems sum to 113 points, but a maximum score for this
assignment is 100 points. Nothing over 100 points will be counted.
Rambling or incoherent responses shall be penalized even if correct.
Points are rewarded for answers consistent with those your instructor would
give to the same question.
This exam is 6 pages (including this front page), numbered 0-5.
If questions ask for x parts, only the first x answers will be graded.
For grading only: score received on the following PAGE
1
Total
2
3
4
5
.
I.
(25 pts, 5 pts each) Answer 5 of the following 6 parts.
a)
Define competitive equilibrium
b) It is illegal to buy or sell human organs. As of 2007, there were 80,000 patients on a waiting list
for organ donations. Compare the allocative efficiency of the current waiting list method of
distributing versus a competitive market distribution system where buying and selling organs
would be legal.
c)
Is the following an example of a pareto improvement? Why?
Jeff likes bananas only and Andrew likes apples only. However, Jeff owns a banana farm, and
Andrew owns an apple orchard. The government wants everyone to have a balanced diet, so Jeff
and Andrew are forced to trade: Andrew gets bananas from Jeff in exchange for apples.
d) List the 3 of the 4 assumptions used in introductory microeconomics.
e)
List the necessary and sufficient conditions for a productively efficient allocation of resources in
the normal case.
f)
It is a fact that people with higher incomes tend to drive faster. Use the concept of opportunity
cost to give one possible explanation for this fact.
1 II. (20 pts, 10 pts each) Use the following two PPfs to answer 2 of the following 3 parts.
Each of these PPF is for a given 10-hour endowment of labor
a)
Compute the resource cost of production of each good for each state (be sure to include units):
Soybeans
Sugar Beets
Minnesota
Illinois
b) Compute the opportunity cost of production of each good for each state (be sure to include units):
Soybeans
Sugar Beets
Minnesota
Illinois
c)
Draw the joint (or aggregate) PPF.
2 III. (24 pts, 8 pts each) Answer 3 of the following 4 parts.
Consumer 1 has demand curve given by P= 20 – 1/2Q
Consumer 2 has demand curve given by P= 20 – 1/2Q.
Note: These two demand curves are the same.
a)
Graph each consumer’s demand curve on the same axes.
b) Graph the market demand curve.
c)
Describe what happens to the market demand curve as the population grows.
d) Explain how we know that if all individual demand curves obey the Law of Demand then the
market demand curve obeys the Law of demand.
3 IV. (24 pts, 8 pts each)
Answer 3 of the following 4 parts.
Consumer A owns a finite amount of resources that has a value of $600. There are two goods in the
economy: bricks and fricks. For Consumer A, bricks and fricks are perfect 1:1 substitutes. The price
of a brick, Pb, is $3 and the price of a frick, Pf, is $3 also.
a)
Draw 3 indifference curves for consumer A (and arrow for increasing utility) as well as the budget
constraint on a labeled graph. What is the slope of the budget line?
b) Suppose that Pf = $6. Draw 3 indifference curves for consumer A as well as the budget constraint
on a labeled graph. What is the slope of the budget line?
c)
Suppose we do NOT know consumer A’s preferences, but we DO observe that when income
increases 25%, the quantity demanded for fricks decreases by 35%. What type of good is fricks?
d) The graph below shows consumer A’s budget constraint. Consumer A chooses bundle X though
bundle Y is affordable. What do you know about consumer A’s preferences over bundles X and
Y? That is, which bundle is preferred and how do you know?
Fricks
X
Y
Bricks
4 V. (20 pts, 5 pts each) Answer 4 of the following 5 parts.
Consider the following production possibilities table of some society:
A
B
C
D
E
a)
Margarine
10
9
7
4
0
Butter
0
2
4
6
8
Graph this PPF. Indicate an output bundle that is productively efficient.
b) Calculate the opportunity cost in terms of margarine from moving from output bundle A to
bundle B.
c)
Explain the intuition behind the Law of Increasing Opportunity Cost. Does this society’s exhibit
increasing opportunity cost?
d) Suppose that nobody likes margarine. How should resources be allocated to production?
e)
Suppose margarine and butter nearly satisfy the same types of needs. What kinds of goods are
they?
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