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Berkeley ECON 100A - MOCK FINAL EXAMINATION

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Economics 100AProf. Daniel McFaddenFall 2001MOCK FINAL EXAMINATIONDecember 4, 2001Name: ____________________________________SID #: ____________________________________GSI: ____________________________________Instructions:Mark only on the exam.Do not separate pages.Calculators are permitted.MULTIPLE CHOICEFor the following questions circle the ONE correct answer.1. Judy divides her consumption between orange juice and bagels. Orange juice costs $1.00 perglass and bagels cost $3.00 each. Judy consumes positive amounts of both goods, and haschosen consumption quantities where her marginal utility of orange juice is 10 utils per glass, hermarginal utility of bagels is 25 utils per bagel, and she spends all her income.a. Judy cannot increase utility further, given her income.b. Judy can increase utility by consuming more orange juice and fewer bagels.c. Judy can increase utility by consuming less orange juice and more bagels.d. Judy should consume only orange juice.ANSWER __b__2. In a used car market, 25 percent of the cars are lemons and the rest are gems. Buyers do notknow if a car is a lemon or a gem, but sellers know. Buyers are willing to pay 120 percent ofseller's value for a car, and seller's values are $4,000 for a gem and $2,000 for a lemon. Inmarket equilibrium,a. price is between 4,000 and 4,800, and deadweight loss is zero.b. price is between 4,000 and 4,800, and deadweight loss is positive.c. price is between 2,000 and 2,400, and deadweight loss is zero.d. price is between 2,000 and 2,400, and deadweight loss is positive.ANSWER __a__3. A firm has both domestic and overseas demand. If the price elasticity of overseas demand isless than the price elasticity of domestic demand, the firm willa. sell more product overseas.b. sell more product domestically.c. charge a higher price overseas.d. charge a higher price domestically.ANSWER __c__4. Farmer Jones sells carrots and buys beets. His income elasticity of demand for both carrotsand beets is positive. An increase in the price of carrots causes him toa. increase carrot consumption due to the substitution effect, and increase carrot consumptiondue to the income effect.b. decrease carrot consumption due to the substitution effect, and decrease carrot consumptiondue to the income effect.c. increase carrot consumption due to the substitution effect, and decrease carrot consumptiondue to the income effect.d. decrease carrot consumption due to the substitution effect, and increase carrot consumptiondue to the income effect.ANSWER ___d_5. If the price of butter rises, then in the market for a substitute such as margerine,a.supply shifts to the left.b.supply shifts to the right.c.demand shifts to the left.d.demand shifts to the right.ANSWER __d__6. If goods in year 1 and year 2 are both normal goods, then an increase in income in year 1a.increases both savings and consumption in year 1.b.increases savings and decreases consumption in year 1.c.decreases savings and increases consumption in year 1.d.decreases both savings and consumption in year 1.ANSWER __a__7. If the interest rate is 5%, find the present value of $10.00 received in two years.a.$9.07b.$9.52c.$10.50d.$11.03ANSWER __a__8. Oskar is an expected utility maximizer whose utility of wealth W (measured in thousands ofdollars) is U(W) = 200W - W2. Oskar has initial wealth W = 100, but faces a 50 percent risk oflosing 10 and a 10 percent risk of losing 100, due to a flood. Which of the following alternativeswill he choose?a. Buy no flood insurance.b. Buy complete insurance that costs 20.c. Buy "10-deductable" insurance that costs 10 and repays any loss over 10.ANSWER ___c__9. If a commodity for which a consumer is a net buyer is an inferior good, thena. increasing price must increase demand.b. demand rises less than proportionally with income.c. the income effect reinforces the substitution effect.d. falling income increases demand.ANSWER ___d__10. A firm facing the curve to the right givingthe value in dollars of the total product of alaborer will hire this worker for the hoursnecessary to achieve pointa. Ab. Bc.CANSWER __a___11. Robert has utility function U(xA,xB) = xA2xB2, where xA is the quantity of apples and xB thequantity of banana he consume. If the price of apples is pA, the price of bananas is pB, and hisincome is m, then Robert’s demand for apples is(a) m/(2pA)(b) 0.25pAm(c) m/(pA + pB)(d) m(pA/pB)ANSWER: (a)12. The Engel curve of good x:(a) traces all the optimal values of x as the price of x increases, holding income constant.(b) is upward sloping when x is a normal good(c) is the same as the inverse demand curve of x(d) all of the aboveHoursCompetiti ve WageValue of Total Pro ductDollarsacbANSWER: (b)13 Jon considers x and y to be perfect substitutes. Specifically, he has a utility function of theform U(x,y) = x + y. Suppose that Jon’s income is 720 and that originally the cost of x and y is10 and 9, respectively. If the price of x drops to 8, then:(a) the income effect increases the quantity of y by 90.(b) the substitution effect increases the quantity of y by 80(c) the substitution effect increases the quantity of x by 90(d) the income effect increases the quantity of x by 80ANSWER: (c)14. Suppose that the income and substitution effects of an increase in the price of x work indifferent directions. That is, suppose one effect works toward increasing the quantitiesdemanded of x, while the other works toward decreasing the quantities demanded of x. Then weknow that:(a) good x is a normal good(b) good x cannot be a Giffen good(c) the income effect works toward decreasing the quantities demanded of x.(d) none of the aboveANSWER: (d) y B A C x15. Consider the graph above. Point A is an initial optimal bundle. Point C is the optimalbundle resulting after a decrease in the price of good x, while holding the price of y and incomeconstant. Points B and C are bundles on the same indifference curve. The dotted line is just aparallel translation of the initial budget line.(a) The move from point ___ to point corresponds to the substitution effect.(b) The move from point to point ___ corresponds to the income effect.(c) The move from point ___ to point ___ corresponds to the total price effect.(d) Is x a normal or inferior good?(e) If point A were to the right of point B, would your answer to part (d) be different? How?ANSWER:(a) B, C(b) A, B(c) A, C(d) Normal(e) Yes. With A to the right of B, answer to


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Berkeley ECON 100A - MOCK FINAL EXAMINATION

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