Midterm Examination 815 Spring 2012

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  • Topic: Supply and demand, Inverse demand function, Microeconomics
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Midterm Examination Economics 815 Spring 2012 Professor D. Weisman

I. Short Answer (40 points). Answer 4 (and only 4) of the following 6 questions. 1 Market demand function is given by Q = 20 – 2P. A price change occurs that simultaneously raises revenue and increases consumers’ surplus. What is the direction of the price change? What can you tell me about price in this market prior to the change? What can you infer about the price elasticity of demand before the price change? A firm’s production function is given by Q = 4K0.5L0.5, where K is capital and L is labor. Suppose that w = 2 and r = 2. How much K and L would the firm optimally employ to produce 64 units of output? What is the total cost of producing this level of output? Demand is given by QD = 20 – P. Supply is given by QS = 10. What price ceiling does the government set in this market if consumers are better off by $50 under the price ceiling relative to the free-market outcome? The airlines have estimated that the average price of an airline ticket would rise by $40 if the government mandated child safety seats on airplanes. The government believes this policy would reduce fatalities on airplanes by 400 per year. The demand function for automobile travel is QM = 200 - PG + I + 0.75PA, were QM is quantity of miles driven per year (in units of 100,000 miles), PG is the price per gallon of gasoline, I is per-capita income (in thousands of dollars) and PA is the average price of an airline ticket (in dollars). The government estimates that there are 10 automobile fatalities for each 100,000 miles driven. Determine whether mandating child safety seats on airplanes will save lives? Provide the economic rationale for your answer. Quantity demanded is given by Q = 40 – 2P. What is the price that prevails in this market if consumer surplus is equal to 64? What is the price elasticity of demand at this price? Suppose that the production function for...
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