Final Exam Review 2 - Intermediate Microeconomic Theory | ECO 202, Exams of Microeconomics

Download Final Exam Review 2 - Intermediate Microeconomic Theory | ECO 202 and more Exams Microeconomics in PDF only on Docsity! Name Davidson College Mark C. Foley Department of Economics Aug - Dec 2005 Intermediate Microeconomic Theory Review #2 Due in Chambers 3140, by 4 p.m. Friday Directions: This review is an untimed, closed-book, closed-notes exam. You may start and stop as many times as you like, as long as you do not study further once you’ve begun. You may use a calculator. There are 150 points on the exam. Each short answer question is worth 4 points. Each problem in Section II is worth 25 points. The problems in Sections III are worth 15 points each. You must show all your work to receive full credit. Any assumptions you make and intermediate steps should be clearly indicated. Do not simply write down a final answer to the problems without an explanation. Read the questions carefully, answering what is asked. Think clearly and work efficiently. Carpe diem. Honor Pledge Start times Stop times 2 Section II: Problems Do these 4 questions (No choice ). 1. The table below contains data on observed prices and choices for three different goods ),,( 321 xxx at three different prices ),,( 321 ppp in three different situations, A, B, and C. Situation 1p 2p 3p 1x 2x 3x A 1 2 8 2 1 3 B 4 1 8 3 4 2 C 3 1 2 2 6 2 (a) Do these observations violate the weak axiom of revealed preference? Support your answer. (b) Do these observations violate the strong axiom of revealed preference? Support your answer. 5 2. Suppose the market for DVD players is described by the supply function PQ S 2 and the demand function PQD 300 . (a) Graph both lines, labeling the axes and intercepts. Solve for equilibrium price and quantity. (b) Calculate the price elasticity of demand at the equilibrium. (c) Assume the government now provides a $12 per unit subsidy to consumers. Calculate the change in consumer surplus. (d) Calculate the amount of deadweight loss, label the area on your graph above, and explain why there is a deadweight loss with the subsidy. 6 3. (a) Write down the Slutsky equation, and provide a brief interpretation for each term. (b) Referring to the Slutsky equation, what is the necessary condition for demand for good X to be Giffen? Be very specific about the sign and magnitude of each term. (c) In class, we said that we never observe Hicksian demand in the real world, but we do observe Marshallian demand. Why? (d) Part (c) is not quite true. Describe a real world situation in which we could observe the substitution effect directly, independently of the income effect. (Look carefully at the terms of the Slutsky equation.) 7 6. Mrs. Doubtfire owns a house worth $300,000. She cares only about her wealth, W, which consists entirely of her house, according to the utility function 4 5 WU  . In any given year, there is a 2 percent chance that the house will burn down. If it does, its scrap value is $30,000. (a) Is she risk-averse, risk-loving, or risk-neutral? Support your answer mathematically and explain. (b) How much would she be willing to pay to insure her house against being destroyed by fire? (c) Describe the limitations of the theory of expected utility maximization and offer alternative concepts to explain economic behavior under uncertainty. 10 7. Consider the following demand curve: PQ 351  where P is the price per unit of output, and Q is the quantity of output. (a) What price and quantity combination would maximize total revenue? (b) What is the price range over which a price increase would lead to an increase in total revenue? (c) Prove that the linear demand curve, bPaQ  , where a and b are positive constants, is unit-elastic at its mid-point. 11