Midterm Exam

Directions: The examination is closed book and closed notes.
Do all work on the exam itself.  If you cannot answer the problem
in the assigned space, answer on the back of the exam,
indicating that you have done so.

 

 

Name                                                                                                                                      

 

 

Location: (Circle One)

Ashtabula

Geauga

East Liverpool

Lorain

Kent

Salem

Stark

Tuscawaras

 

1

2

3

4

5

S

 

Problem 1 (25 %)

A commodity has a demand function Q = 36- 4 P.

 

(a)   Compute the point price elasticity when P = 3.

(b)   Suppose the product sells for a price of $3.  How much consumer surplus do consumers get?

(c)    Now suppose the government imposes as $2 tax on each unit sold. Compute the deadweight loss.

Problem 2 (15%)

John Smith sells shoes for $10 an hour.  He works 40 hours a week.  He could work more hours or fewer hours, but he chooses 40.  John is now offered a new job selling shoes. He will be paid $100 a week, and a commission, which he figures works out to $7.50 a hour.  In all other respects, the new job is the same.  Will he take it?  And will the commission induce him to work harder?  Remember, a well-explained and well labeled graph is sometimes worth a thousand words.

Problem 3 (30%)

 

Ethyl Wilson has income of $300,000.  The figure above shows her utility U as a function of income Y.  I have plotted three dotted lines showing income of $200,000, $250,000 and $300,000.  (I deleted the 000 ).   There is a 50% chance that she will suffer a loss of $100,000.   Using this graph, indicate the maximum amount she will be willing to pay for insurance against this risk.  Explain and defend your answer. Hint: you will want to draw a couple of lines.  It will not be enough to simply label a point and say “this is it”.

Problem 4 (30%)

The demand for widgets is Q = 10405- 25P.  Right now each of 8 firms in the industry has a cost function C = 2700 + 15q + 12q2. 

 

  • What will be the price of widgets?  How many will be sold?
  • Suppose now firms may enter and leave the industry freely.  All new firms will have the same cost function.  When equilibrium is reached (no firms want to enter of leave), what will be the price of widgets?   How many firms will there be?  How many widgets will each firm produce?

Problem 5 (10%)

As you may have read the State of Ohio is facing a severe budget crisis.  It is rumored that the State is considering a $5 per month per employee payroll tax.  That is, each firm would be taxed $5 a month for each employee.   Some opponents of this tax argue that it would make Ohio firms less competitive in the global marketplace; they propose that employees, not employers, be required to pay the tax.   Supporters of the tax object, on the grounds that it would reduce incomes in a depressed economy.  Comment: which proposal would leave workers better off? Firms better off?  Which would have the greater impact on total Ohio employment?