Name:___________________________ SID:__________________________GSI name: ______________________ Section #:__________________________ECON 100ASPRING 2013MIDTERM IIInstructions- BREATHE!- This exam will last 80 minutes. No extensions will be granted.- Before you hand in the exam, make sure your name AND SID are at the top of the page, as well as your GSI’s name.- By taking this exam, you acknowledge that the use of outside materials is not permitted. Anyone caught using outside material, including your neighbor’s exam, will get 0 points on the exam. - Before you start working, read the questions carefully.- If you have any questions, ask!GOOD LUCK!PART I – 10 T/F, 3 points each1Mark whether the following statements are true or false. No explanation needed. 1. The expected value of a fair bet for a risk preferring individual is greater than zero. TRUE FALSE2. Elasticity of substitution for production function Q = L + K equals 1. TRUE FALSE3. The expansion path of a fixed-proportion (Leontiff) production function is independent of input prices. TRUE FALSE4. A firm that is making zero profits has no revenue. TRUE FALSE5. A specific subsidy will change both profits and quantity supplied in the market. TRUE FALSE6. Harold’s elasticity of demand for burgers is higher than Kumar’s. Therefore Harold’s consumer surplus from consuming a $5 burger is higher than Kumar’s. TRUE FALSE7. The Arrow-Pratt measure is zero for risk neutral individual. TRUE FALSE8. If MPL is increasing, APL must be increasing as well.TRUE FALSE9. All fixed costs are sunk costs. TRUE FALSE10. EV > CS for a normal good. 2TRUE FALSEPART II – 4 SHORT ANSWER QUESTIONS, 8.5 points each1. Graph the short-run ATC, AVC & MC for a firm that is making negative profits but is still producing. On your graph identify total revenue, total costs and the size of negative profits (Assume the firm has U-shaped ATC & AVC). 32. Does the production function Q = L + K0.5 exhibit constant, increasing or decreasing returns to scale? Show your answer mathematically. Add a graph of the LR average and marginal cost curves of such production. 2Q(K,L) = 2L + 2K0.5 > Q(2L,2K) = 2L + 20.5 K0.53. List the 3 reasons discussed in class for why LR costs are lower than SR costs. Show it graphically using isoquants, isocosts and the SR & LR expansion paths. The three reasons: technological change, flexibility, learning by doing. 44. Brian is risk averse for income up to $50,000 and risk loving over $50,000.a. Graph Brian’s utility of wealth function. 5b. Brian currently earns $50,000 and he has an opportunity to accept a risky job that has 0.6 probability of earning $60,000 or 0.4 probability of earning $40,000. Add thisbet to your graph. Will Brian take the job? Explain your answer. EV = 0.6*60,000 + 0.4*40,000 = 52,000. At 52,000 Brian’s expected utility is higher than his utility with certainty, since he is risk averse for income over 52,000. Therefore he would accept the job. Long-Answer Question #1 – 18 pointsMitch is working as a free-lance animation artist and earns $20/hr. He currently works 12 hours. a. Draw Mitch budget constraint and indifference curve. Be sure to mark the number of hours worked and the corresponding income on your axis (6 points). 6480384 12 24b. A new income tax of 20% is imposed on Mitch. What is his post-tax hourly wage? Add to your graph his new budget constraint (6 points).New wage is 16 (2 points), graph 4 pointsc. Mitch chooses to work 12 hours after the tax was imposed. Add the new indifference curve to your graph. Can you tell whether leisure is an inferior or normal good for Mitch? Explain your answer (6 points). The tax makes leisure cheaper, since wage decreased. That means that the substitution effect will cause Mitch to consume more leisure and less labor – he would work less than 12 hours. Butsince he ends up working for 12 hours, that means that his income effect took him in the opposite direction than the substitution effect, which means that leisure is a normal good. Long-Answer Question #2 – 18 pointsThe University of California limits the number of food vendors on campus to 10. Food vendors are identical and have U-shaped long run cost curves. At the current market equilibrium, each vendor currently earns positive economic profits.a. Draw the firm's long run Average Cost and Marginal Cost. In a separate graph, draw the market supply curve and a demand curve which is consistent with vendors earning positive economic profits. In your graph be sure to mark the shut-down quantity, the equilibrium quantity producedby each firm and the equilibrium quantity in the market (6 points).7b. Students from the economics department complain to campus administration about the lack of competition and demand that entry to be a food vendor on campus will not be limited. Show on your market graph the LR equilibrium quantity and price if free entry is allowed. Mark on your graph the change in consumer surplus with the new equilibrium you found (6 points). Highlighted in yellowc. Current campus vendors are concerned with the loss of profits if entry becomes free and convince campus administration to provide them a specific subsidy rather than open entry to themarket. Add to your graphs (both the firm and market graphs) the effect of a specific subsidy that results in the same market equilibrium as if the market was free entry (the one you found inpart b) (6 points). EXTRA CREDIT QUESTIONBoth Alex Steffen and Clay Shirky discuss drivers for a better world. Who of the two speakers sees technology as the means and who sees it as the end goal?
View Full Document
Unlocking...