S. Klepper, Economics 73-100, Fall 2011
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 order to compensate traders that were unable to make a transaction in the first two rounds, all traders were offered a payment of $.40 if they did not make a transaction in the third round. Otherwise, all the rules of the experiment were the same, including the receipt of a $.05 commission for trading a unit. Assume there were exactly 60 traders in all three rounds of the experiment.
Which of the following statements correctly describe the third round of the experiment according to the model of supply and demand?
_____1. No buyer would have purchased a unit at prices above $3.20.
_____2. All sellers with costs greater than or equal to $2.10 would not have sold their unit.
_____3. The price would have been the same as in rounds 1 and 2.
_____4. The quantity transacted would have been less than in rounds 1 and 2.
_____5. Some traders would have earned $.40 more in profit than they earned in rounds 1 and 2.
_____6. Every trader would have earned greater profits than in rounds 1 and 2.
_____7. Forty percent of the traders would have accepted the payment of $.40 and not made a transaction.
_____8. All sellers that sold their unit in round 3 would have earned the same profit as in rounds 1 and 2.
 2. Consider a consumer that purchases two goods, food and clothing. Originally the consumer spent half his income on each good. Subsequent events caused the price of clothing to increase by 50% and the consumer’s income to increase by 25%, with the price of food remaining the same. Assume that the consumer’s tastes did not change over time, so that the consumer got the same utility from any particular consumption bundle both before and after the price and income changes.
Which of the following correctly describe the situation of the consumer after the increase in income and the price of clothing?
_____9. The maximum amount of food the consumer could purchase was greater after the increase in income and the price of clothing.
_____10. The consumer had just enough income to purchase the same combination of food and clothing that he/she previously purchased.
_____11. The consumer sustained an (unequivocal) rise in real income as a result of the increase in income and the price of clothing.
_____12. The consumer purchased more units of both food and clothing after the increase in income and the price of clothing.
_____13. The consumer was better off after the increase in income and the price of clothing.
_____14. The ratio of the marginal utility of food to the marginal utility of clothing after the increase in income and the price of clothing (i.e., at the quantities of food and clothing purchased after the increase in income and the price of clothing) was the same as the ratio of the marginal utilities before the increase in income and the price of clothing.
 3. Consider the second experiment. Suppose a third round of the experiment was played in which the government intervened in the trading process. It stipulated that traders had to make all exchanges with the government at the fixed rate of two units of good Y for each unit of good X. The government would use its stock of goods X and Y to satisfy all comers—i.e., the government would be prepared to make any trades that were proposed by traders. Suppose that all other aspects of the experiment were the same—the level schedule was the same, the initial allocations of good X and Y were the same, and the reward structure was the same, including the commission.
Assume that in the first two rounds, one unit of X traded for one unit of Y, as predicted by the model of consumer choice. Which of the following statements correctly describe the outcome of the experiment in the third round under these circumstances according to the model of consumer choice? Mark true for a correct statement and false for an incorrect one.
_____15. In round three, traders that began with 12X and 48Y would have the same budget line as traders that began with 48X and 12Y.
_____16. The budget lines of both traders in the third round would have crossed their budget lines in the first two rounds.
_____17. For traders that began with 12X and 48Y, the combination of X and Y that maximized their profits in the first two rounds was inside their budget line in the third round.
_____18. Traders that began with 48X and 12Y would have been able to trade to get to level 6 but not to a higher level.
_____19. Traders that began with 48X and 12Y would have been able to purchase the bundle they chose in the first two rounds.
_____20. In the third round, traders that began with 48X and 12Y would have wanted to trade units of good X for good Y until their willingness to pay for the marginal unit of good X equaled one unit of good Y.