Introductory Microeconomics - EC155A and B

October 14, 2002 

FIRST EXAMINATION

 

DIRECTIONS:

 

·        Please write out the honor code in the space below, then sign and print you name.  Do not write your name on any individual pages within the exam.

 

HONOR CODE:

 

 

 

 

 

_____________________

Signature

 

 

_____________________

Name

 

 

·        Please circle your section

 

EC155A (9:05 - 9:55)                    EC155B (10:10 - 11:00)

 

·        First read over the sections: if you are uncertain about any question, please ask for clarification. 

 

·        The exam is comprised of four sections, which each have five questions.  Each question is worth five points, so the total number of available points is 100. If you plan to use 2 hours (with some additional time to check your work), you will be on pace if you complete one section every 30 minutes.  You may use up to 2 ½ hours to complete the exam.

 

·        All answers should be legible, and all formulas and graphs should be properly labeled.  You may use any books, articles, and notes that you have brought into class, as well as a calculator.

 

·        Partial credit will be awarded, so you are encouraged to show your work on every problem.  

 

 

I.  Thinking like an economist (25 points)

 

ANSWER FIVE OUT OF THE SIX QUESTIONS IN THIS SECTION: (AMONG QUESTIONS I.A – I.F)  THERE IS NO EXTRA CREDIT FOR ANSWERING ALL SIX.

A.                 Tiger Woods is arguably the world’s best known athlete.  Because of his popularity, Woods is often offered ‘appearance fees’ of $2,000,000 by organizers of golf tournaments.  Even if he plays very poorly in such tournaments, Woods is guaranteed a paycheck of $2,000,000 just by ‘appearing’ for four days.

Yet Woods often turns down such lucrative invitations.  Use the concepts of opportunity cost and of marginal utility to explain Wood’s decision to not accept such an invitation. 

 

 

 

 

 

 

 

 

 

B.                 The production possibilities frontier below shows the amounts of ice cream and frozen yogurt that Ben & Jerry’s can produce.  On the graph, carefully illustrate how the imposition of a price floor for milk products in Vermont will affect this frontier.  Defend your answer.

 

Ice cream

 
 

 

 

 

 

 

 

 



C.                 Over the last five years, the tuition at Middlebury College has increased.  Each year, has the new tuition been an ‘equilibrium’ price?  Defend your answer.

 

 

 

 

 

 

 

 

 

 

D.                 The Otter Creek Brewery announces that it will increase the wages of all of its factory workers by $4 per hour.  On the two graphs, carefully illustrate how this announcement will affect the supply curve for: (a) factory workers at Otter Creek; and (b) self-employed carpenters in Middlebury.  Defend your answers.

 

Factory workers at Otter Creek
 

Wage
 
 

 

 

 

 

 

 

 

 


Quantity of workers

 

Self-employed carpenters
 

Quantity of carpenters

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


E.                  The data below are based on the reported willingness to pay for beans among families in West Virginia.  When these families earn $15,000 per year, is demand elastic or inelastic?  Among these families, are beans a normal good or an inferior good?  Defend your answers.

Price

Quantity demanded (income = $15,000)

Quantity demanded (income = $30,000)

$    0.25

10,000

15,000

$    0.75

6,000

9,000

$    1.25

2,000

3,000

 

 

 

 

 

 

 

 

 

F.                  A family in Bolivia is trying to maximize their utility as they purchase food (f), clothes (c), and medicine (m).  If the prices of clothes and of medicine suddenly fall so that MUf/Pf < MUc/Pc = MUm/Pm, will the family then buy more or less food?  Defend your answer.


II.        Using supply and demand (25 points)

Many Vermonters claim that the lack of affordable housing in Vermont is the state’s most pressing economic and social problem.  In the past three years, the average price of a house in Addison County has gone up by 35 percent --- while incomes have barely increased.  (According to the Center for Rural Studies at UVM, the median per household income in Addison County in 2000 was $43,000.)

  1. In a small mountainous community in Addison County, the demand and supply for housing in 2001 were as follows:

·        Qs = 20

·        Qd = 25 – 0.0001 P

What were the equilibrium price and quantity in the housing market for this community in 2001?

 

 

 

 

 

 

 

 

 


  1. In the beginning of 2002, those demand and supply schedules still hold. Then, after the preservation of more wilderness area in the Green Mountain National Forest in the surrounding mountains, demand for houses in this community shifts further out.  Specifically, five different Middlebury College alums (persons A – E) call the town’s real estate agent in the middle of 2002 and announce that they are each interested in buying one house in this community.  The five Midd alums conclude their phone calls with the following statements.

·        (Person A) ‘I will pay up to $200,000 for any one house in this community.

·        (Person B) ‘I will pay up to $175,000 for any one house in this community.

·        (Person C) ‘I will pay up to $150,000 for any one house in this community.

·        (Person D) ‘I will pay up to $125,000 for any one house in this community.

·        (Person E) ‘I will pay up to $100,000 for any one house in this community.

Using the grid below, plot the demand schedule for each of these Midd alums in 2002, and then plot the total market demand schedule for the five Midd alums.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


  1. By the end of 2002, a price of $100,000 is clearing the market in this town.  At  this price, what is the total number of houses that have been sold in this community. At  this price, how many of the five Midd alums will have bought a house in this town?  Among those Midd alum who did buy, what was each of their consumer surpluses? 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  1. Based on the information provided here, are wilderness and mountain houses compliments or substitutes?  Defend you answer.

 

 

 

 

 

 

 

 

 

 


  1. If the trend that began in 2002 continues --- more Midd alums wanting to buy more houses in Addison County -- what is the likely effect on the housing rental market?  Given all of the information presented here, should the State of Vermont establish rent control?  Should the State of Vermont establish a ‘living wage’?  Defend your answers.

 

III.       Taxation and the logic of consumer choice (25 points)

Let’s say that the state of Rhode Island has recently increased the sales tax on a pack of cigarettes by $2.50, so that a pack of cigarettes in which used to sell for $2.00 in Providence, Rhode Island now sells for $4.00.  The primary goal of this policy is to further reduce smoking among all Rhode Islanders, particularly among high school students.

  1. Explain why the price of a pack of cigarettes in Providence only increased by $2.00 if the tax was $2.50?  Defend you answer.

 

 

 

 

 

 

 

 

  1. The map of Rhode Island below shows the location of Providence and Block Island. (Connecticut is to the east of Rhode Island, and Massachusetts is to the north and west of Rhode Island).  After the tax, do you think that the price of cigarettes was higher in Providence or Block Island?  Defend you answer.

BLOCK ISLAND
 

PROVIDENCE
 

 

 

  1. The graph below illustrates the family of indifference curves for a young smoker in Providence, Rhode Island who also likes pizza.  It also shows the budget constraint for the smoker before the imposition of the tax.

With the information that you have been given, carefully draw and label on the graph below: (a) this smoker’s new budget constraint (if any) after the imposition of the tax, and (b) this smoker’s new family of indifference curves (if any) after the imposition of the tax.

Pizza

 

Cigarettes

 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


  1. This Rhode Islander has a sister who is severely allergic to cigarette smoke. On the graph above, carefully label two indifference curves for the sister.  Which of the four axioms about preferences are not true in her case, if any?  Defend your answer.

 

 

 

 

 

 

 

 

  1. A year after the imposition of the tax, the tax commissioner calls the Governor of Rhode Island and declares: “This tax has been a huge success!  We have increased our revenues from cigarette sales from $20 million to $38 million.  I now propose that we increase the sales tax on pizza by $2.50 per pizza so that we can dramatically increase our revenues from the sale of pizza.”

Do you agree with the commissioner that the tax on cigarettes has been a success? Do you agree with the commissioner that the sales tax on pizza should be increased?  Defend your answers.

 

 

IV.       Putting microeconomic reasoning to work (25 points)

 

In the beginning of The Invisible Heart, Laura Silver makes it clear that she has a very different view of the role of government than does Sam Roberts.  (And this difference seems to run in the family, as Sam discovers over dinner!)  Laura’s main concern seems to be that market outcomes are not fair, so that an active government should oversee markets and correct them for fairness.

On the issue of school vouchers, Sam would certainly agree with The Black Alliance for Educational Options (BAEO), an organization of African-American families who are “working to increase quality educational options and to empower families to meet their children's needs.”  This group has been very successful in promoting the increased use of ‘school vouchers,’ which are a public policy for transforming the forces of education scarcity into market forces. 

The way a school voucher program works is simple.  The family of each grade school child in a large (typically urban) education district gets a ‘voucher’ in April.  They can then ‘cash in’ the voucher at any public or private school in the district.  When they ‘cash in’ the voucher, say, at the Benjamin Banneker School, the family gets the right to send their child to the school in the following September; the Banneker school then submits the voucher to the state and receives $8000 (the estimated average cost of educating a child in this district). 

Advocates of vouchers claim that this method dramatically increases the quality of education in municipal school districts, since all schools have the incentive to improve in order to attract and retain students.  Opponents of vouchers attack them as unfair: some students will be in better schools than others, and less successful schools in some neighborhoods may close, forcing students to commute further to find alternative schools.  These opponents believe that highly-trained education superintendents can assure the long-term improvement of all schools in a district.

Do you think that vouchers are a good public policy for improving the overall quality of education?  Is a voucher system fair?  Carefully defend your answers with clear, analytical reasoning.