Quiz One Name__________________
PAI 723
Professor John McPeak
Total quiz is worth 20 points, each numbered question is worth 2 points, and each sub question (the a / b / c / d parts) are worth equal shares of the two points.
1) Taxes. In all cases, describe the original equilibrium price quantity pair, the price paid by consumers, the price received by producers, the size of the tax revenue, and the quantity supplied / demanded when the tax is imposed.
a. Illustrate on a graph the impact of a specific tax placed on producers.
b. Illustrate on a graph the impact of an ad valorem tax placed on consumers.
c. Explain the concept of consumer incidence using the graph you drew for (b).
2) Match the outcome to the policy that could generate it and show the impact on a supply and demand curve. Label all curves, axes, and points.
Policy:
Price floor.
Price ceiling.
A specific tax on consumers.
Introduction of new production regulations.
Outcome Policy
Government purchase of ______________________
surplus to maintain price.
Equilibrium price paid by consumers ______________________
is greater than the price received by suppliers
Consumers wait in lines ______________________
to obtain the good (due to nonmarket rationing)
Equilibrium price paid by consumers ______________________
increases and quantity sold decreases
3) We
know Q_{d}=1002*p and Q_{s}=50+3*p
characterizes the market in
a. What is the equilibrium price quantity pair if the market is perfectly competitive (assume there is not difference between different companies’ software programs)?
b. To help low income families cope with changes in the tax code, a local politician is suggesting a policy that will require all tax software prices be below $15.00. What impact will the imposition of this policy have on the quantity supplied of tax preparation software if it is imposed? Illustrate using supply and demand curves.
4) Fred is a student who has just received a grant of $1,000 per month that can only be used for educational expenses. His current stipend is $2,000 per month (and this is not changed when he gets the grant). The price of one unit of education is $200. The price of one unit of food is $10. Fred only consumes food and education.
a. Illustrate Fred’s original budget line and his budget line after he receives the grant.
b. After Fred gets the grant, he is called before the granting agency since they notice that he has been gaining weight. They accuse him of violating the terms of the grant that only allow the grant to be used for educational expenses and explicitly states the grant can not be used to purchase food. How can Fred illustrate to them using microeconomic theory that his increased consumption of food is not evidence that he has violated the terms of the grant?
5) The demand curve is given to you as Q=10050*P.
a. Fill out the following table.
Price 
Quantity 
$1.50 

$1.25 

$1.00 

$0.75 

$0.50 

b. Fill out the following table. Use the relatively higher price / lower quantity pair in calculation of the elasticity.
Price 
Elasticity 
From $1.50 to $1.25 

From $1.25 to $1.00 

From $1.00 to $0.75 

From $0.75 to $0.50 

c. Draw this demand curve with price on the y axis and quantity on the x axis. Identify on this graph the range over which the demand curve is inelastic, and over which it is elastic. Identify the unit elastic point.
6) Say that you know for a particular consumer and particular consumption bundle the marginal utility of consuming peanuts is 10 and the marginal utility of consuming bananas is 5.
a. The negative of the ratio of these marginal utilities defines the slope of what curve?
b. If the price of a unit of peanuts is 2, the price of each banana is 5, and the consumption bundle defined above is on the budget line, why is the consumption bundle identified above not an optimal bundle?
c. Should we increase peanut consumption alone, increase banana consumption alone, increase both, or reduce both to arrive at the optimal bundle? Why? (Illustrate using a graph)
7) Suppose you are setting tolls for a bridge connecting a residential island to the mainland. The current toll is $2 per trip and there are currently 100,000 trips per hour.
a. How many trips will there be if you raise the toll by 25% and the price elasticity of demand for bridge crossing is 1.5?
b. How will this change your revenue per hour?
c. What if the estimate of the price elasticity in (a) is wrong and price elasticity is in fact 0.75. What will be the change in revenue per hour for the same price change if this second elasticity is in fact true?
8) The commodity we are analyzing is chicken soup.
a. Draw a graph showing an upward demand shift (to the northeast^{*}) and provide a story that explains what caused this demand shift.
b. Draw a graph showing a downward supply shift (to the southeast) and provide a story that explains what caused this demand shift.
*This is what I mean by a
shift to the northeast or southeast from the starting point at the center of
this table.
Northwest 
Northeast 
Southwest 
Southeast 
9) Definitions of goods using elasticities.
Column A 
Column B 
Column C 
Type of Good 
The type of good in
column A is defined using which type of elasticity? (circle one) 
The elasticity you
circled in column B is positive or negative according to the definition of
the good in Column A? (Circle one) 
Normal Good 
Own price demand elasticity Cross price elasticity Income elasticity Supply elasticity 
Positive Negative 
Complementary Good 
Own price demand elasticity Cross price elasticity Income elasticity Supply elasticity 
Positive Negative 
Inferior Good 
Own price demand elasticity Cross price elasticity Income elasticity Supply elasticity 
Positive Negative 
Substitute Good 
Own price demand elasticity Cross price elasticity Income elasticity Supply elasticity 
Positive Negative 
Giffen Good

Own price demand elasticity Cross price elasticity Income elasticity Supply elasticity 
Positive Negative 
10) Consumer theory basics.
a. What is the technical name for the slope of the budget line?
b. What is the relationship between the utility function and the indifference curves?
c. Is the derivation of the individual’s demand curve related to the price consumption curve or the income consumption curve? Explain.