Midterm I
ECO 405
Fall 2021
NAME
SCORE /60
Instructions:
• This is an open-book, open-notes exam. Students may use all course materials to
answer the exam questions. However, students may not use outside materials (e.g.,
Googling the answers to the exam questions).
• Students must complete the exam individually. Collaboration between students is
not permitted.
• Answer all questions. Be sure to show your work in order to receive credit.
• Be sure to carefully label all curves, axes, and intercepts in your graphs.
• An answer to a True / False question without an explanation will receive no credit.
• Once you begin the exam on UBlearns, you will have TWO HOURS (plus accom-
modations) to complete the exam and an additional THIRTY MINUTES (same for
all students) to scan and upload your answers. Late submissions will be penalized.
• Answers should be uploaded to UBlearns as a single PDF file. You can
either (a) print the exam and write your answers directly on the test or (b) write your
answers on your own paper. For scanning, it is highly recommended that you use one
of the mobile scanning apps (e.g., AdobeScan or CamScanner), which produce high-
quality images and collect them into a single PDF file. Please make sure that the exam
questions are scanned in order. Please do not submit exams by email.
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1. List the factor(s) that cause shifts in the demand curve. (2 points)
2. List the factor(s) that cause movement along the demand curve. (2 points)
3. List the factor(s) that cause shifts in the supply curve. (2 points)
4. List the factor(s) that cause movement along the supply curve. (2 points)
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5. True / False. Introducing (binding) rent control into the market for rental apartments
causes a loss of consumer surplus for certain and possibly producer surplus as well.
Explain. Include a graph in your answer. (4 points)
6. True / False. At the current price of $9 per year, UB Transportation estimates that
the price elasticity of demand for parking is = −2. If the goal of UB Transportation
is to maximize their parking revenue, they should raise the price of parking. Explain.
(3 points)
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7. For a consumer with preferences over the commodities x and y given by u(x, y) =
min {3x, 2y}, draw the indifference curve that passes through the point (3, 3). Label
this point on your graph. What is the MRS of x for y at (3, 3)? (3 points)
Q8-Q10. A particular consumer of red wine is always willing to substitute between bottles
of merlot and bottles of pinot noir at a constant rate of three bottles of merlot (commodity
x) for one bottle of pinot noir (commodity y) and vice versa.
8. For this consumer, what type of goods are merlot and pinot noir? (1 point)
9. What is the consumer’s marginal rate of substitution of merlot for pinot noir? (2
points)
10. If the price of pinot noir were twice the price of merlot, how would this consumer
allocate his wine budget between the two types of wines? Explain. (2 points)
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Q11-Q19. Consider a student who purchases education (x) and other goods (y). The student
has preferences over these goods given by u(x, y) = ln(x) + 3ln(y). The prices of education
and other goods are, respectively, px = 10 and py = 5, and the student’s income is I = 20.
11. Derive expressions for MUx (x, y) and MUy (x, y). (2 points)
12. What do lim
x→0
MUx(x, y) and lim
y→0
MUy(x, y) tell you about the optimal consumption
bundle? (2 points)
13. Find an expression for the slope of the indifference curve through the point (x, y). (2
points)
14. Write the equation of the budget constraint and calculate its slope. (2 points)
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15. Write the Langrangian for the student’s optimization problem and derive the first order
conditions assuming an interior solution. (4 points)
16. Using the first-order conditions you derived, find the student’s optimal consumption of
education x∗ and other goods y∗ and derive an algebraic expression for the student’s
income expansion path. (3 points)
17. Graph the budget constraint, IEP, optimal bundle (x∗, y∗), and the indifference curve
passing through the optimal consumption bundle. Label all curves, axes, slopes, and
intercepts. Put education on the x-axis. (4 points)
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18. Suppose now that the student receives a voucher for 1 free unit of education from the
government. In other words, the price of her first unit of education is zero, and the
price of any additional units is the original price px = 10. The student cannot sell the
voucher. Both I and py are unchanged. Draw the new budget constraint under the
voucher program. Be sure to label any important point(s) on the constraint and label
the slope(s) of the constraint. Put education on the x-axis. (2 points)
19. Find the optimal consumption of x and y for the student when she receives the voucher.
(2 points)
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Q20-Q24. The market for cheap beer is characterized by the following supply and demand
curves:
S : q = p+ 3
D : q = −2p+ 24
Suppose the government puts a $3 tax on cheap beer.
20. Before the tax, what are the initial equilibrium price and quantity in the cheap beer
market? (2 points)
21. Using the point elasticity formula, calculate the price elasticities of supply and demand
at the initial equilibrium. (2 points)
22. From the elasticities you calculated, do you expect the incidence of the tax to fall more
heavily on the consumers or the producers? Explain. (2 points)
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23. Calculate the effects of the tax on: (i) the price faced by consumers, (ii) the price
received by producers, and (iii) the quantity traded in the market. (4 points)
24. Draw a graph showing the initial equilibrium and illustrating the impact of the tax.
Label all curves and axes and all relevant prices and quantities. Identify in your graph
the deadweight loss and the revenue raised for the government. (4 points)
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