- November 30, 2020
Microeconomics (Fall 2015)
Part I (4 points each; total 40 points), Part II (30 points each; total 60 points)
Part I: Short‐answer questions (4 points each)
- How can we treat a subsidy like a ‘negative tax’?
- Explain the difference between the marginal product of labor and the average product of
- Suppose that the market demand for cola‐bottles is Q = 200 – 100P. What is the price
elasticity of demand for cola‐bottles at P = $1. Is it elastic or inelastic? Explain your answer
and show your working.
- True or false; explain your answer. “High school education is a classic example of a public
good because it is both provided by the government and also benefits everyone.”
- Write down in words what is meant by the marginal rate of substitution of bananas for
- Explain the difference between economic cost and accounting cost.
- On a fully‐labeled graph, draw an Engel Curve for a normal good.
- Define what is meant by the law of diminishing marginal returns.
- What are the main characteristics of a perfectly competitive industry?
- What is the difference between a positive and normative statement in economics? Give
an example of each type of statement when explaining your answer.
Part II: Long‐answer questions (30 points each; 60 points total)
- Sweet Corporation produces orange juice. OJ is produced with the use of squeezing
machines S and labor L according to the production function:
Q = F(L,S) = L*S
Where Q is in 100s of gallons
1.1 (5 points) What is the marginal rate of technical substitution of labor for squeezing
1.2 (5 points) When the factory has 6 squeezing machines and 2 workers, how many
squeezing machines can be substituted by an additional worker?
1.3 (10 points) Suppose that each machine costs $20 an hour and workers get paid $10 an
hour. If Sweet wants to produce Q gallons of juice, what is the cheapest way to do so? (In
other words, how many workers and machines should it employ in order to minimize costs
subject to producing Q gallons?)
1.4 (5 points) What is the cost function of Sweet? What is its average cost and marginal cost
1.5 (5 points) Now, suppose that a change in climate makes oranges less juicy, which
results in a new cost function:
TC = Q*Q
Does Sweet’s new cost function exhibit economies or diseconomies of scale?
- Bob likes video games V and clubbing C. His utility function is:
U(V,C) = SQRT (V*C)
2.1 (6 points) What is the marginal rate of substitution of video games for clubbing?
2.2 (12 points) Suppose that the price of video games is Pv and the price of a night of
clubbing is Pc and that Bob has I dollars per month to spend on entertainment. How many
units of V and C will he purchase in order to maximize utility?
2.3 (12 points) Suppose that the price of video games is Pv = $37.50 and the price of a night
of clubbing is Pc = $25 and that Bob has I = $150 per month to spend on entertainment.
How many units of V and C will he purchase in order to maximize utility?