S. Klepper, Economics 73-100

PREPARATION FOR EXAM I

Material Covered on Exam I

Production possibilities curves

Supply and Demand

Utility, marginal utility, and consumption choices

Budget lines, indifference curves, and consumer choice

Suggestions for Studying for Exam

Exam covers lecture more than problem sets

Do past exam questions

Attend Monday and Tuesday review sessions

problem set book (brief answers also are in book)

Sample Question

1. Consider experiment 1. Assume that the total number of traders was a multiple of 20, so that there were an equal number of buyers with each redemption value and sellers with each cost. Suppose that each buyer with a redemption value of $2.10 was assigned a seller with a cost less than or equal to $2.10, with the seller obligated to sell its unit to the buyer at a price of $2.10. Analogously, suppose each seller with a cost of $2.90 was assigned a buyer with a redemption value of $2.90 or greater, with the buyer obligated to purchase the sellerís unit at a price of $2.90. The rest of the traders, called the unassigned traders, were allowed to make trades at any prices they liked, subject to the rules of the experimentói.e., sellers could not sell at prices less than their costs and buyers could not buy at prices greater than their redemption values. All other aspects of the experiment were the same as the version conducted in class. Which of the following statements correctly predict the outcome of this version of the experiment according to the model of supply and demand? Mark true for correct statements and false for incorrect ones.

_____1. The price of trades among the unassigned traders would be the same as the price of trades in the version of the experiment conducted in class.

_____2. Seven out of every eight unassigned sellers would sell their unit.

_____3. The total number of units traded by all traders, including both the assigned and unassigned traders, would be the same as the number of units traded in the version of the experiment conducted in class.

Before you try to answer the above questions, derive the supply and demand schedules of the unassigned traders. Each of these can only be determined for a restricted range of prices, but that is all you will need to answer the questions.