# CSUN ECON 500 - Take Home Exam #3 (6 pages)

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## Take Home Exam #3

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- Pages:
- 6
- School:
- California State University, Northridge
- Course:
- Econ 500 - Economics Survey

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Take Home Exam 3 Answer Key ECON 500 Summer 2004 1 Suppose that under current market conditions the price elasticity of demand for oranges is p 34 while the income elasticity of demand for oranges is I 58 a Would an increase in the price of oranges lead to an increase or decrease in total consumer expenditures on oranges Explain 6 points Since p 34 1 p 0 demand is inelastic Therefore an increase in the price of oranges will result in increased consumer expenditure on oranges b Would an increase in consumer income lead to an increase or decrease in demand for oranges Explain 6 points Since I 58 0 oranges are a normal good As a result an increase in consumer income will lead to an increase in demand for oranges 2 Consider the production function F L K 10 K L2 For this function MPL 2 L and MPK 10 a How much output can the firm produce with L K 10 20 4 points q F 10 20 200 100 300 b Determine the functional form of MRTS L K 4 points MRTS L K c MPL 2 L 1 L MPK 10 5 Is the Marginal Rate of Technical Substitution Diminishing Explain 6 points When increasing labor and decreasing capital while maintaining the initial level of output the value of MRTS L K 15 L will increase not decrease Therefore the Marginal Rate of Technical Substitution is NOT Diminishing Sketch the isoquant associated with q 300 units of output 4 points d Since MRTS L K 15 L is increasing not diminishing each isoquant becomes stepper as one moves to higher labor lower capital input combinations Thus the isoquant associated with q 300 units of output looks something like K 30 20 0 L 10 0 3 Suppose the demand for boxes of Franzia wine is given by the function 1 D p 6 p for 0 p 36 As a result D p 2 p a Derive an expression for price elasticity of demand as a function of price 8 points As a function of price p D p and D p p Substituting D p 6 D p p 1 p leads to p This expression can be 2 p 6 p 2 p 1 simplified to p p 12 2 p b Is demand elastic inelastic or unit elastic if the price of a box of wine is p 9

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