MIDTERM EXAMINATION I

        Intermediate Microeconomics
        (ECON 520)

September 16, 1998      Professor D. Weisman

Instructions: There are two parts to this examination weighted 50 points each. Please 
write legibly and think carefully about your answers. You may find that graphical 
and/or mathematical analysis will assist you in answering some of these questions. 
Good Luck!

Part I.  Multiple Choice (50 points). Please indicate your choice for the best answer 
to each question on the standardized answer sheet provided.

1.      Which of the following is a positive statement?
a.      A course in intermediate microeconomics tends to increase student 
scores on the law school admissions test (LSAT).
b.      College football coaches should not be paid more than economics 
professors.
c.      Smoking should be restricted on all airline flights.
d.      Requiring each student to take at least one semester of calculus is a bad 
idea. 
e.      none of the above.

2.      CNN=s reporting of the most costly hurricanes over the last two decades and 
the Manhattan Mercury=s reporting of salaries of professors at KSU relative to 
other universities were both potentially misleading because:
a.      They failed to adjust for differences in purchasing power across time and 
across different geographic regions of the country. 
b.      The comparisons were in nominal rather than in real dollars. 
c.      The markets under analysis were not perfectly competitive.
d.      None of the above. 
e.      a. and b. only. 

3.      The total cost of pursuing your MBA following graduation includes:
a.      your tuition expenses.
b.      your expenditures for books and materials. 
c.      the opportunity cost of your time, both class time and study time. 
d.      the foregone salary you would have earned in the job you would have 
accepted had you not attended graduate school.
e       all of the above.

4.      Which of the following will cause a shift to the left in the supply curve of 
gasoline?
a.      A decrease in the price of gasoline.
b.      An increase in the wage rate of refinery workers.
c.      A decrease in the price of crude oil.
d.      An improvement in oil refining technology.

e.      all of the above.

Use the following information to answer the next three questions.

The demand for books is:        Qd = 120 - 2P
The supply of books is:         Qs = 4P

5.      What is the equilibrium price of books?
a.      5
b.      10
c.      25
d.      20

6.      What is the equilibrium quantity of books sold?
a.      25
b.      50
c.      40
d.      100
e.      none of the above

7.      The price elasticity of demand at the market equilibrium is:
a.      inelastic.
b.      elastic.
c.      unitary elastic.
d.      none of the above.

8.      When the government intervenes in a market causing the price of a product to 
be below the free market equilibrium price 
a.      consumers are always better off. 
b.      there will be excess demand.
c.      total consumers= surplus may rise or fall.
d.      quantity supplied will increase.
e.      b. and c. only. 

9.      Suppose, that at the market clearing price of electricity, the price elasticity of 
demand is -1.4 and the price elasticity of supply is 0.8. What will result from 
a price ceiling that is 10 percent below the market clearing price?
a.      A shortage equal to 6 percent of the market clearing quantity.
b.      A shortage equal to 22 percent of the market clearing quantity.
c.      A shortage equal to 18 percent of the market clearing quantity.
d.      More information is needed to answer this question. 


10.     The price elasticity of long distance telephone service is -0.7 and the cross 
elasticity of long distance telephone service and local telephone service is -
0.25. A regulatory policy that reduced the price of long distance telephone 
service by 20 percent and increased the price of local telephone service by 8 
percent would result in
a.      no change in the quantity demanded of long distance calls. 
b.      a 6 percent increase in the quantity demanded of long distance calls.
c.      a 12 percent increase in the quantity demanded of long distance calls.
d.      a 12 percent decrease in the quantity demanded of long distance calls.
e.      a 9.5 percent increase in the quantity demanded of long distance calls.

11      Which of the following would likely result in a shift to the right of the demand 
curve? 
a.      an increase in the price of the good.
b.      a decrease in the price of the good.
c.      a decrease in the quality of the good.
d.      an increase in the prices of inputs required to manufacture the good.
e.      none of the above. 

12.     If the price of automobiles increases ceteris paribus, this would be expected 
to result in
a.      an increase in the equilibrium price of gasoline.       
b.      a decrease in the equilibrium price of gasoline. 
c.      no change in the equilibrium price of gasoline. 
d.      an increase in consumers= surplus in the market for automobiles. 
e.      none of the above. 

13.     A business firm faces a demand curve for its product that is given by 
Q = 20 - 2P. The firm implements a small price change that results in an increase in 
both revenue and consumers= surplus. This implies that 
a.      Price was reduced and the initial price was greater than 5.
b.      Price was increased and the initial price was less than 10.
c.      Price was reduced and the initial price was less than 5.
d.      Price was increased and the initial price was greater than 2.
e.      none of the above.

14.     If a firm sets a price at which the price elasticity of demand is equal to -1 then
a.      the firm is maximizing revenue at this price.
b.      a small change in the price will not result in a change in revenue.
c.      price should be raised to increase revenue.
d.      price should be reduced to increase revenue.
e.      a. and b. 

15.     Suppose that the demand function for legal services is given by 
Q = 100P-0.6, where P is the price of legal services and Q is the quantity of 
legal services demanded. A 20 percent increase in the price of legal services 
ceteris paribus implies that  
a.      demand for legal services will decrease by 12 percent. 

b.      demand for legal services will decrease by 20 percent. 
c.      demand for legal services will increase by 12 percent. 
d.      demand for legal services will remain unchanged. 
e.      none of the above. 


Part II. Problems (50 points). There are two questions and each is worth 25 points. 
Show all of your work to receive partial credit. Please write legibly and be precise 
with your answers. 

1.      Analysis of Supply and Demand.

a.      The price and quantity at the midpoint of the linear demand function are 
given respectively by P = 4 and Q = 12.  Find the equation of the linear 
demand curve? 

b.      Suppose that supply is perfectly inelastic and is given by Qs = 6. Use the 
demand function you derived in part a to determine the equilibrium 
price and quantity? What is consumers= surplus at this market 
equilibrium? 

c.      The demand function for apples is given by QA = 14 - PA + 2qA, where 
QA and PA denote the quantity of apples and the price of apples, 
respectively, and qA denotes a  measure of apple quality. Suppose 
initially that PA = 10 and qA = 3. What is the quantity of apples 
demanded? What is consumers= surplus?

d.      Suppose now that PA  remains unchanged from part c. How might apple 
producers realize a 20% increase in the quantity of apples demanded? 
 

e.      Would consumers prefer a price/quality combination PA = 10 and 
qA = 3 to a price/quality combination PA = 12 and qA = 4? Explain your 
answer carefully.


2. Take-Home Essay Question. 

Instructions: This is the take-home essay question for your first examination 
in this class and is worth 25 points. This essay is to be turned in (without 
exception) at the time of your in-class examination. The essay must be typed, 
either double-spaced or one and one-half spaced, use a font size no smaller 
than 12 pt. and not exceed a single page in length. [It is not necessary to type 
the graphs that you may choose to use in your analysis, but they should be 
drawn precisely and carefully explained.] Your name, student number, and 
class time (e.g., 8:30 or 9:30) should appear in the upper right-hand corner of 
your essay. You are encouraged to work with your classmates in developing 
the ideas necessary to answer this question, but the write-up itself should be 
your own work. These instructions should be followed precisely. [Note: If you 
failed to produce this essay beforehand, you may use whatever time you have 
available during this examination period to draft your essay. Unspecified point 
penalties will be assessed, however.]


The United Auto Workers (UAW) carried out a prolonged strike against 
General Motors (GM) Corporation in the summer of 1998. This strike resulted 
in financial losses to GM that are expected to exceed one billion dollars. In 
addition, GM dealerships around the country experienced sizable reductions 
in new car inventories. 
 
The business press reported that during the summer of 1998 the average price 
of  used cars increased dramatically. (i) Use supply and demand analysis to 
explain this phenomenon. Be precise in your statements and make sure that 
your verbal discussion supports and reinforces your graphical analysis. (ii) Do 
you believe the strike against GM affected the average price of new Chrysler 
and Ford automobiles that were sold? Explain your reasoning carefully. (iii) 
Were consumers hurt as a result of this strike? How might you measure this 
loss to consumers? Explain your reasoning carefully.