Midterm I.Econ 101Professor GuseMonday October 16, 2006.Instructions. You have 55 minutes to complete the exam. There are 55 points available. Pleasewrite your responses on the exam itself in the space provided. If you require additional space, writeon the back of the page. You may refer only to your own handwritten, two-sided, “cheat sheet”.Calculators and all other references materials are not allowed. If a question asks for a numericquantity you may leave your answer in expression form for full credit. (e.g. “40−305” would beperfectly acceptable in place of “2”.) Be sure to label any diagrams you draw, to show your workand to explain your reasoning. Please turn in your cheat sheet with your exam. Thank you andgood luck!Name:Pledge:11. SHORT ANSWER (10 Points).(a) (4 points) In a classical short-run total product curve, if output is increasing at anincreasing rate theni. marginal product is increasing / decreasing (circle one).ii. average product is increasing / decreasing (circle one).iii. marginal cost is increasing / decreasing (circle one).iv. average variable cost is increasing / decreasing (circle one).(b) (2 points) Johanna is willing to acce pt a loss of not more than 5 Republican seats inthe House of Representatives for a gain of 2 Republican seats in the Senate. Johanna’sof House seats for Senate seats is52.(c) (4 points) It takes Elisa 1 hour to bake a loaf of bread and 3 hours to catch a fish. Janetakes 2 hours to make a loaf of bread. Jane has comparative advantage over Elisa inbread making. What can you say about Jane’s fishing?22. (20 points) Scrooge has wealth equal to $2000 which he can spend on two goods, currentconsumption and savings. The of price of current consumption is $1. The price of savings is$1.(a) (5 Points) In a diagram with current consumption on the horizontal axis and savings onthe vertical axis, draw Scrooge’s budget line. Label it “(a)”.(b) (10 Points) The government decides to tax current consumption over $1000 at a rate of$1 per $1. That is, Scrooge will not owe any tax if he spends $1000 or less in currentconsumption. However, if, for example, Scrooge spends $1060 in current consumption,he would have to pay a tax of $60. Draw his new budget line. Label it “(b)”.(c) (5 Points) Difficult. It turns out that under the new tax, Scrooge lowers his currentconsumption to exactly $1000. Moreover, the tax rate imposed was the lowest tax ratethat induces Scrooge to do this. Carefully draw Scrooge’s indifference curve runningthrough the point (1000, 1000). What is Scrooge’s MRS of savings for consumption atthat point?33. (25 Points) Virginia receives $350 each month to spend on pizza and beer. Her preferencesfrom month to month never change. Her budget lines and choices for July and August areshown below in Figure 1.Pizza (Pies)JulyAug5070Beer (Pints)B024.318 35Figure 1. Virginia’s budgets and choices for pizza and beer in July and August.(a) (3 points) What were the prices of beer in July and August?(b) (2 points) What were the prices of pizza in J uly and August?(c) (5 points) B0was Virginia’s level of beer consumption in July. What is B0equal to?4(d) (5 points) Going solely on the one change in price we know about, what is the cross-priceelasticity of pizza with respect to the price of beer. Explain.(e) (10 points) Sketch a demand curve for beer from the data in Figure 1. Be sure that yourdiagram is