EconS 301, Spring 2015, Dr. Rosenman
Sample Test 1
Do any three of questions 1, 2, 3 and 4, and do question 5. The three questions you do out of 1-4 are
worth 10 points each, and question 5 is worth 20 points. I am figuring 10 minutes each for the first 3,
and 30 minutes for question 5. That leaves 15 minutes for panic and other activities.
1. Consider the following demand and supply for bicycles: Qd=600-3P-5T+5M and Qs=-100+P where P
is the price of bicycles, T is the price of tires and M is income in 1000s of dollars.
a. If T=10 and M=30, find the equilibrium price of bicycles.
b. At the equilibrium values, calculate the price elasticity of demand and the price elasticity of supply.
c. At the equilibrium values, calculate the cross price elasticity of demand for bicycles with respect to the
price of tires, and indicate if they are substitutes or complements.
d. At the equilibrium values, calculate the income elasticity of demand for bicycles and what type of
good we would classify bicycles as.
2. Ann has a utility function U(x,y)=x2y
a. Find Ann’s demand curve for x as a function of Px, Py and income (I).
b. Find her income elasticity of demand for x and her cross-price elasticity of demand for x with respect
to the price of y.
c. If x costs $8 per unit and y cost $2 per unit and income is $240 find Ann’s utility maximizing choice of x
and y.
d. What is the marginal rate of substitution of x for y when utility is maximized?
e. If the price of x decreases to $6 per unit, will Ann’s marginal rate of substitution of x for y increase or
decrease? Explain if her consumption of x will increase or decrease.
3. In March 2005, President Bush imposed tariffs of 8-30% on imported steel to protect the US steel
industry. Most steel is used by other firms, so the demand for steel comes from companies that make
automobiles or do major construction projects. Their quantity demanded for steel is a good indicator of
how much they produce. Suppose these companies use steel from both US steel producers and foreign
producers
a. Graphically, show how the tariffs affected equilibrium price and quantity of steel bought by domestic
automobile and construction firms. Explain what your graph shows.
b. Explain, using your graph how it changed the producer’s surplus of both domestic and foreign steel
producers.
c. Indicate how much revenue the government collected from the tariff.
d. Critics of the tariff argued that it cost more jobs than it created. Referring to your graph, explain what
they meant.
4. The Affordable Care Act forces people to buy health insurance if they don’t get coverage through
work. To make the problem easier, assume people already buy some health insurance, but the ACA
makes them buy more.
a. Using an indifference curve analysis, show that for many people the ACA lowers their utility.
b. For low income people there is a tax credit which rebates part of the cost of buying the health
insurance. Suppose the tax credit is equal to their cost of buying the required insurance. Show that
their utility be higher than without the ACA, but potentially lower than if they were just given an equal
sized cash grant.
c. One possible different policy is to offer a subsidy on the price of health insurance. A critique of this
policy is that it will not increase health insurance as much, even if the total subsidy is the same.
Decompose the price decrease into income and substitution effects, and show that if the amount of
health insurance bought is less than the equivalent cost of a health insurance tax credit, it must mean
that other goods are normal goods.
5. For any FIVE (5) of the statements below, indicate if it is True, False or Uncertain, and explain why.
Each is worth 4 points. You may also choose TWO (2) additional questions as extra credit on the test.
Each extra credit question is worth 2.5 points. Clearly indicate which questions are for extra credit. If
you don’t, the first 5 you do will be the regular test questions.
a. Tim consumes only goods A and B. Good B is a normal good. The local government has a
referendum allowing people to choose among two taxes. The first tax will apply only to good B.
The second tax will apply to both goods equally. The two taxes raise the same revenue. Tim will
vote for the second tax.
b. Flatter indifference curves have larger income effects.
c. The price of food increases by 10% and you spend a larger fraction of your income on it. The
good is a luxury good.
d. The price of food decreases by 10%. After the price change you spend a larger fraction of your
income on other goods. For you the price elasticity of demand for food is inelastic.
e. Due to a flood, corn prices and soybean prices both increase. If corn and soybeans are
substitutes the equilibrium quantity of corn demanded falls.
f.
If pizza and calzones are substitutes, the income effect of a price increase for pizza must show
that pizza is an inferior good.
g. For Mitzi shampoo and conditioner are perfect complements. For each squirt of shampoo she
uses one squirt of conditioner. Mitzi’s indifference curve for shampoo and conditioner is a
straight line with a slope of -1.
h. Until recently China imposed a quota on Washington apple imports to China. Washington apple
producers would have preferred the Chinese impose a tariff (tax) on their apples instead of the
quota, even if it resulted in the same amount of exports from Washington to China.
i.
An increase in gas taxes rebated to consumers through an income tax credit will likely decrease
the use of gasoline, and leave consumers equally well off in terms of utility as if there was no
tax.
j.
The supply of health insurance is relatively steep, while the demand for health insurance is
relatively flat. The subsidy provided by the ACA increases seller’s surplus more than it increases
consumer surplus.
k. If the slope of a price-consumption line is horizontal when price of the good on the horizontal
axis is changing, the income effect must be zero.