Posted: March 23rd, 2023

EconS305: Intermediate Microeconomics Without Calculus SES WSU

EconS305: Intermediate Microeconomics Without Calculus SES WSU
Midterm (100 points)
Show all your work to get full credit.
Please note that no late submission will be accepted, and plagiarism will
be controlled.
1. (3 Points) What is the MRS between two complementary goods? Show on the graph.
Explain and provide the MRS formula.
2. (1 Point) T/F: Convexity of the indifference curve is due to non-satiation.
3. (1 Point) T/F: If a decrease in income causes an individual’s demand curve for a
good to shift to the left, then the good is inferior.
4. (20 Points) Consider the following utility Jose gets from consuming two goods, x,
and z:
U¯ = x
0.6
z
0.4
The price for good x is Px = 6, the price for good z is Pz = 8, and Jose’s income (Y)
is 128.
• Find MRSxz and explain.
• Write down and graph budget constraints.
• Write down the optimality condition.
• Using the optimality condition and budget line, derive the optimal quantity of
x and z.
• Find Jose’s utility level.
5. (5 Points) If Nicole’s annual income decreases from $100,000 to $75,000 and her
demand for haddock increases from 50 to 75, calculate the income elasticity of demand
for haddock. What type of good is haddock for Nicole?
6. (40 Points) Audrey is a college student at Smallville State University. Suppose
that she only consumes food (f) and housing (h) with the following utility function:
U = f
0.6h
0.4
.
• Find the demand functions for food and housing. Do they satisfy the law of
demand?
• Suppose that Audrey’s salary, Y = 100; price of food, pf = 5, and price of
housing, ph = 10. Find the amount of food and housing demanded. Then, solve
for Audrey’s utility level given the amount of food and housing demanded.
• Audrey will be moving to the Metropolis upon graduation. Suppose that the
price of food is the same, pf = 5, but the price of housing is more expensive
ph = 20. Without any changes in income, find the amount of food and housing
demanded in this new city.
Magdana Kondaridze, PhD Candidate 1
EconS305: Intermediate Microeconomics Without Calculus SES WSU
• Her new employer at the Metropolis thinks that the appropriate compensation
for Audrey should be to give her enough income such that she could buy the
same bundle as before in Smallville. Using new prices and old demand, the
employer pays her $140. This can be obtained from the following:
pf,new × fold + ph,new × hold = Y
5(12) + 20(4) = 140
The issue is that paying $140 is not efficient for the firm. In other words, Audrey’s
employer can pay her less. Find the amount of income that makes Audrey
indifferent between Smallville and Metropolis.
• Find the Compensating Variation. Interpret your finding
7. (15 Points) Consider the following demand function and supply function in a good
market:
qd = 30 − 4p
qs = 2p − 6
• Find the equilibrium price and equilibrium quantity.
• Invert the demand function and the supply function. Calculate the consumer
surplus and producer surplus. Then, find the total welfare.
• Suppose that price ceiling has been imposed to p
ceiling = 4. Would this scenario
result in excess demand or excess supply? Find the excess value.
• Graph and find the consumer surplus, producer surplus, and total welfare.
Clearly label the graph. (Hint: Use the vertical intercepts from the inverted
demand and supply functions to graph).
• Find the Dead Weight Loss (DWL).
8. (15 Points) Consider the following demand and supply functions:
qd = 15 − 2p
qs = p − 3
• Find the market equilibrium price and quantity.
• $2 tax has been imposed on every unit of good that consumers buy. Find the
the price that is received by the supplier and the price a consumer pays.
• A $2 tax has been imposed on every unit of good that consumers buy. Find the
the price that is received by the supplier and the price a consumer pays.
• What is the total revenue obtained by the government from imposing the $2
tax?
• Show the consumer surplus, producer surplus, buyer’s burden, seller’s burden,
and Dead Weight Loss on a graph. Clearly label the graph.
• Find how much the buyer bears on the tax and how much the seller pays. Who
pays more?
Magdana Kondaridze, PhD Candidate 2

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