S.
Klepper, Economics 73-100, Fall 2007
There are a total of three major questions, each weighted according to the points listed to the left of the question. These are the points apportioned to each question. They sum to 100
Each
of the major questions has a series of subsidiary questions. Each of these subsidiary questions is a
true-false question. To answer the
question, indicate in your exam booklet whether the answer is true or false and
provide a brief explanation for your answer. Correct answers with insufficient
explanations will get no points. When
you finish, hand in only your exam booklet.
The
exam is open-book and open-notes. If you
have any questions at all, then ask the proctor to help you. Do not introduce any assumptions (beyond
those introduced in class) without consulting the proctor.
[40] 1. Consider the first experiment conducted in class. Suppose a third round of the experiment had
been conducted. All buyers and sellers had
the same costs and redemption values as in the first two rounds. Buyers were told that if they purchased a
unit, they would have to pay a tax to the experimenter of $.40. They could not end up making negative profits
after paying the tax—i.e., the price they paid would have to leave them with a
profit (before receiving any commission) of at least $.40 in order to pay the
tax. As in the first two rounds, both
buyers and sellers would receive a commission of $.05 if they transacted a
unit. Assume that the setup of the
experiment was repeated exactly three times, so that there were three buyers
with each redemption value and three sellers with each cost.
Which
of the following statements correctly describe the outcome of the third round
of the experiment according to the model of supply and demand? Mark true for a correct statement and false
for an incorrect one.
_____1. No buyer in the
third round would have been willing to purchase a unit at a price above $3.60.
_____2. Every buyer in the
third round would have been willing to purchase a unit at a price of $2.10.
_____3. The market supply
curve in the third round would have been the same as the market supply curve in
the second round.
_____4. The price in the
third round would have been $.40 less than the price in the second round.
_____5. No buyer with a redemption value below $2.70 would have purchased a unit in the third round
_____6. Some sellers that sold a unit in the first two rounds would not have sold a unit in the third round.
_____7. Every buyer that
purchased a unit in the third round would have earned $.20 less in profits,
including the commission, than they earned in the first two rounds.
_____8. Every seller that
made a transaction in the first two rounds would have earned lower profits,
including the commission, in the third round than in the first two rounds.
[25] 2. Consider a country that produces two goods, food and shelter,
using one input, labor. Suppose that
initially each unit of food can be produced with the same number of units of
labor and each unit of shelter can also be produced with the same number of
units of labor. An innovation in home
construction occurs that reduces by 50% the amount of labor required to produce
the first 100 units of shelter. It also
reduces the amount of labor required to produce the next 100 units of shelter,
but only by 25%. It has no effect on the
amount of labor required to produce subsequent units of shelter (above 200) nor
on the amount of labor required to produce each unit of food. Assume that before the innovation, the country
could produce over 200 units of shelter.
Which of the following statements concerning this situation are
true? Mark true for a correct statement
and false for an incorrect one.
_____9. The production
possibilities curve for the country is concave-shaped after the innovation.
_____10. The innovation
increases the maximum number of units of food that the country can produce.
_____11. After the
innovation, the opportunity cost of the first 100 units of shelter is half as
much as the opportunity cost of the next 100 units of shelter.
_____12. The opportunity
cost of the first unit of food is unaffected by the innovation.
_____13. After the
innovation, the opportunity cost of each of the first 100 units of food
produced is the same.
[35] 3. Consider the second
experiment conducted in class concerning the consumption of two goods X and
Y. Suppose that half the traders were
given an endowment of 44 units of good X and 8 units of good Y and the other half
were given an endowment of 15 units of good X and 51 units of good Y. As in the version of the experiment conducted
in class, all traders were paid a commission on only the first 16 units “sold”
of the good they ended up with less of.
Which of the following statements correctly predict the outcome of this
version of the experiment according to the model of consumer choice? Mark true for a correct prediction and false
for an incorrect one.
Hint:
Make an educated guess at the number of units of good X that would be traded
for one unit of good Y and then analyze the trades each trader would want to
make to determine if your guess is an equilibrium trade ratio.
_____14. Goods X and Y would be traded on a 1:1 basis.
_____15. The slope of the budget line of both types of traders would be the same.
_____16. Both types of traders would trade enough units to qualify for the maximum commission.
_____17. The budget line of the traders that began with 44 units of good X and 8 units of good Y would lie inside the budget line of traders that began with 15 units of good X and 51 units of good Y.
_____18. Both types of traders would earn the same profits.
_____19. After trading, both types of traders would get greater utility from the marginal unit of good X than the marginal unit of good Y.
_____20. After trading, the traders that began with 44 units of good X and 8 units of good Y would have a willingness to pay for the marginal unit of good X that is less than one unit of good Y.