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Econ 301
Exam #1
Summer 2005 Name

Time: 1 hour
Instructions: To obtain credit, you must give arguments to support your answer. The numbers in
brackets at the start oI each question are the numbers oI points the question are worth. Good
Luck!


1) John`s utility Iunction is U x
2
y
1/4
. The price oI x and y are p
x
$2 and p
y
$/ respectively.
His income Y $90. What is his optimal consumption bundle? How much utility does he receive
Irom this bundle? II his utility Iunction changes to be U x
2
y
1/4
50, would his optimal
consumption bundle and utility level change?














2) In class, we identiIied properties associated with ordinal utility. One oI these properties is
'Completeness. Explain what this means.







3) Consider a consumer who can choose between wheat and corn (goods are substitutes).
a. What happens to the demanded amount oI corn iI the price oI wheat increases?



b. What happens to the demanded amount oI wheat iI the price oI corn decreases?



c. What happens to the demanded amount oI wheat iI the income increases? (hint: tell all
possible cases)



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4) U.S. demand Iunction Ior beeI can be written as Q
d
150 6p, domestic and Ioreign supply
Ior beeI are Q
s
d
10 and Q
s
I
2p - 5 respectively. The U.S. government issues a QUOTA policy
that the maximum imports Irom Ioreign countries cannot exceed 15. Derive the new market
supply. (Hint: derive the supply curve Ior all possible price ranges)















5) From the previous question, Iind the equilibrium price and quantity.















6) II a consumer doubles her quantity oI ice cream consumed when her income raises by 25.
Calculate her income elasticity oI demand Ior ice cream. (Hint: the exam oI 'doubles her quantity
oI ice cream is when consumption oI ice cream increases Irom 5 units to 10 units.)













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7) A student claims that a Iirm's total revenue always increases when there is a supply induced
increase in the price oI its product (the increase in the price due to the shiIt in the supply curve).
BrieIly explain the truth or Ialsity oI this statement.












8) Suppose the market demand and supply Ior oranges can be expressed as Qd 100 - 2p and Qs
3p respectively. The government imposes a $5 speciIic tax to be collected Irom sellers. What is
the price consumers pay aIter tax? What is the price producers receive Ior each unit oI their
product aIter the tax? And how much is tax revenue collected?


















9) From the above question, will consumers pay a higher or lower price iI the demand is more
elastic? Use the graph to illustrate your answer.












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10) Assume the graph below, Ior a given consumer, contains an original budget line (I1), an
original maximum attainable utility (U1*), a second or new budget line I2, and a corresponding
new maximum level oI utility (U2*). Show and label in the graph, the substitution eIIect (label
S), the income eIIect (label I), and the total eIIect (label T).
(insert Iigure)











Assume G # oI Godmathers pizzas consumerd
V # oI Valentonio pizzas consumed
Use these notation assumptions Ior the next 2 questions

11) Amy has a pizza budget constraint Ior G and V as drawn in the graph below. Amy regards
good G and V as 'normal goods. II Amy is maximizing her utility by spending / oI her budget
on G, draw an IC that would represent maximum attainable utility Ior Amy. IdentiIy the values oI
G and V at this point and label the maximum attainable utility curve as U*
(insert Iigure)












12) Assume a local Godmothers Pizza restaurant charges you $15 per pizza Ior the Iirst 10 pizzas
that you order during the school year and only $10 per pizza Ior any pizza that you order aIter the
Iirst 10. Meanwhile, Valentonio Pizza charges you $12 per pizza regardless oI how many oI their
pizzas you order during the school year. Draw your budget constraint in the graph below Ior the
school year iI you have $360 to spend on G and V. IdentiIy the value oI G Ior V 0, and the
values oI V Ior G 0 and G 10. (let G on the Y-axis and V on the X-axis)








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13) Fill in the blanks (Note: Ior the last production Iunction, show all possible cases)

Production Function MP
1
MP
2
Return to Scale

ax
1
bx
2



50 x
1
x
2



(x
1
a
x
2
a
)
b








14) Which set oI isoquants (a, b, c) shows CRTS, DRTS, IRTS?
(insert Iigure)