S. Klepper, Economics 73-100, Fall 2009

# Exam I

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.

 1. Consider the first experiment conducted in class.  Suppose a third round of the experiment was conducted in which buyers and sellers were each given two units to buy and sell respectively.  Buyers and sellers could buy and sell their two units separately and in any order they wanted. As in the first two rounds, sellers could not sell a unit for less than its cost and buyers could not buy a unit for more than its redemption value, and each would receive a commission of \$.05 on each unit transacted.  Assume there were 80 traders in total.

The range of redemption values for the second unit of the buyers was the same as for the first unit.  For each buyer, the redemption values for the two units balanced out as follows. If a buyer had the lowest possible redemption value for the first unit (\$2.10) then it would have the highest possible redemption value for the second unit (\$3.60), if it had the second lowest possible redemption value for the first unit (\$2.30) then it would have the second highest possible redemption value for the second unit (\$3.50), and so forth.

The range of costs for the second unit of the sellers was \$.80 higher than for the first unit—the lowest cost was \$2.20 (\$1.40 + \$.80), followed by \$2.30, \$2.40, \$2.50, \$2.70, \$2.90, \$3.10, \$3.30, \$3.50, and \$3.70. The costs of the two units for sellers balanced out, comparable to the buyers. If a seller had the lowest possible cost for the first unit (\$1.40) then it would have the highest possible cost for the second unit (\$3.70), if it had the second lowest possible cost for the first unit (\$1.50) then it would have the second highest possible cost for the second unit (\$3.50), and so forth.

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 correct statements and false for incorrect ones and explain your answers.

_____1. No buyer in the third round would have been willing to purchase a unit at a price above \$3.60.

_____2. Every seller in the third round would have been willing to sell two units of output at a price of \$2.90 or higher.

_____3. Twice as many units would have been traded in the third round as the first two rounds.

_____4. The price in the third round would have been \$2.70.

_____5. Every seller would have sold at least one unit in the third round.

_____6. Half of the buyers would have bought two units in the third round.

_____7. Forty percent of the sellers would have sold two units in the third round.

_____8. Excluding the commission, in the third round each buyer would have earned the same total profits.

_____9. Excluding the commission, in the third round each seller would have earned the same total profits.

_____10. The total profits earned by all buyers together would have been twice as great in the third round as in the first two rounds.

 2.  Consider a consumer that purchases two goods, food and clothing.  Suppose that the consumer always purchases a positive amount of both goods.  Suppose that in the last ten years the prices of both food and clothing increased, with the percentage increase in the price of food greater than the percentage increase in the price of clothing.  Furthermore, suppose that over the same ten year period the consumer’s income increased sufficiently that today the consumer is just able to purchase the same combination of food and clothing it purchased ten years ago. Assume that the consumer’s tastes did not change over the ten year period, so that the consumer gets the same utility from any particular consumption bundle today that it got ten years ago.

Which of the following correctly describe the situation of the consumer?  Mark true for correct statements and false for incorrect ones and explain your answers.

_____11. The budget line of the consumer today must pass through the combination of food and clothing the consumer purchased ten years ago.

_____12. The maximum amount of food the consumer can purchase today is less than the maximum amount of food the consumer could purchase ten years ago.

_____13. The consumer sustained an (unequivocal) rise in real income over the last ten years.

_____14. The consumer was better off ten years ago than today.

_____15. The consumer purchases the same combination of food and clothing today as ten years ago.

 3.Suppose that in the future the federal government makes tuition payments for college tax deductible, which would effectively lower the cost of college tuition.  Which of the following correctly predict the effects of making tuition payments tax deductible according to the analysis of college enrollments discussed in class?  Mark true for correct predictions and false for incorrect ones and explain your answers.

_____16. The percentage of high school graduates that enroll in college will rise.

_____17. The degree of income inequality in the United States will decrease.

_____18. The average earnings of college graduates will rise.

_____19. The difference in the average earnings of college and high school graduates will rise.

_____20. The willingness to pay for the marginal unit of a college education will decrease.