Izmir University of Economics
Department of Economics, Fall 2013
ECON 201 – Theory of Microeconomics
Name:
Student ID #:
2nd Midterm Exam
Note: The duration of the exam is 90 minutes. Good luck!
A) Please state whether the following statements are true or false. In case they are false
please explain the reason. (5 points each)
1) Supply and demand theory shows us that the burden of a sales tax is shared equally by
suppliers and demanders whether the tax is collected from the sellers or collected
from the buyers.
2) If all goods, including leisure, are normal goods, then an increase in the wage rate will
always make people want to work more hours.
3) There is a positive consumer’s surplus when the total amount the consumer pays for
something is less than the amount she would be willing to pay rather than do without
it altogether.
4) If the demand curve is a linear function of price, then the price elasticity of demand is
the same at all prices.
B) Please solve the following questions
1) (20 points) Demand for potatoes is given by Qd= 20 - 2P with Q measured in tons.
The supply of potatoes is given by Qs = 10 + 3P
a. Find the equilibrium price and quantity.
b. Find the elasticity of demand and the elasticity of supply, evaluated at the
equilibrium price and quantity. Is demand elastic, inelastic, or unit elastic? Is
supply elastic, inelastic, or unit elastic?
c. Suppose a (small) sales tax is imposed on potatoes. Would the burden of the tax
fall mostly on consumers, mostly on producers, approximately equally, or is it
impossible to tell from the information above? Explain
2) (15 points) Erhan has an endowment of 5 units of good x and 10 units of good y. He
can buy and sell x at a price of $10 and y at a price of $20. He also receives an income
of $500 as wage.
a. Draw Erhan’s budget line for x and y. Show his initial endowment of x and y on your
diagram.
b. Write an equation for Erhan’s budget.
c. Calculate the amount of x that he could afford if he bought only x and the amount of y
he could afford if he bought only y.
3) (15points) Levent thinks leisure and consuming goods are complements. Goods cost $2
per unit. Levent wants to consume 4 units of goods per 2 hours of leisure. Levent can work as
much as he wants to at the wage rate of $20 an hour. He has no other source of income.
a. How many hours a day will Levent choose to spend as leisure?
b. Draw a diagram showing Levent’s budget and his choice of goods and leisure.
c. Will Levent work more or less if his wage rate increases?
4) (15 points) Assume there are two types of consumers: type A consumers have a demand
Q= 20 –4P for widgets, and consumers of type B have a demand Q=45-3P
a. Calculate the market demand.
b. Assume that the market price for the good is $4 due to perfectly elastic industry
supply. Using the market demand function, calculate the total consumer surplus.
c. Calculate the total consumer surplus using individual demand functions.
5) (20 points) Suppose you are the manager of a firm and the demand function for your
product is X=20-5P. At the moment the price of the product is 3. Your boss wants you
to increase the total revenue. Would you increase or decrease the price to be able to
increase the total revenue? Explain your answer.