# Econ: Supply and Demand and Demand Function

**Topics:**Supply and demand, Inverse demand function, Risk aversion

**Pages:**8 (2817 words)

**Published:**July 1, 2013

ID: B

Econ 2350 Midterm Exam, July 13th, 2010

True/False (total 20 points; 1 point per question) Indicate whether the statement is true or false. Please mark 0 for False and 1 for True. ____ ____ ____ ____ ____ 1. If the price of leeks falls by $2 per pound, then the demand for leeks will rise by 10 pounds. Therefore we can conclude that the demand for leeks is elastic. 2. Marginal revenue is equal to price if the demand curve is horizontal. 3. If there is a price increase for a good that Marilyn consumes, her compensating variation is the change in her income that allows her to purchase her new optimal bundle at the original prices. 4. If the demand curve is a linear function of price, then the price elasticity of demand is the same at all prices. 5. If consumer 1 has the demand function x1 = 1,000 – 2p and consumer 2 has the demand function x2 = 500 – p, then the aggregate demand function for an economy with just these two consumers would be x = 1,500 – 3p for p < 500. 6. The equivalent variation in income from a tax is the amount of extra income that a consumer would need in order to be as well off after the tax is imposed as he was originally. 7. With quasilinear preferences, the equivalent variation and the compensating variation are the same. 8. If the demand curve for a good is given by the equation q 2 p , where q is quantity and p is price, then at any positive price, the elasticity of demand will be –1. ____ 9. The demand curve is inelastic for inferior goods and elastic for normal goods.

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____ 10. If the equation for the demand curve is q = 20 – 2p, then the ratio of marginal revenue to price is constant as price changes. ____ 11. The amount of a good supplied is independent of the price. If a sales tax is imposed on the good, then the price paid by consumers will not change at all. ____ 12. If the elasticity of demand curve for buckwheat is –1.25 at all prices higher than the current price, we would expect that when bad weather reduces the size of the buckwheat crop, total revenue of buckwheat producers will fall. ____ 13. The demand curve, which is a downward-sloping straight line, crosses the supply curve, which is an upward-sloping straight line. If a tax is introduced where sellers must pay a tax of $2 per unit sold, then the equilibrium price paid by demanders will rise by more than $1 if the absolute value of the slope of the demand curve is greater than the absolute value of the slope of the supply curve. ____ 14. If there is Cobb-Douglas utility, compensating and equivalent variation are the same. ____ 15. If there is a price increase for a good that Susan consumes, her compensating variation is the change in her income that allows her to purchase her new optimal bundle at the original prices. ____ 16. Of any two gambles, no matter what their expected returns, a risk averter will choose the one with the smaller variance.

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Name: ________________________

ID: B

____ 17. If Paul is risk loving and his basketball team has a probability of .5 of winning, then Paul would rather bet $10 on his team than $100. (When Paul bets X, he wins X if his team wins and loses X if his team loses.) ____ 18. A consumer has a von Neumann-Morgenstern utility function of the form U(cA, cB, pA, pB) = pAv(cA) + pBv(cB), where pA and pB are the probabilities of events A and B and where cA and cB are consumptions contingent on events A and B respectively. This consumer must be a risk lover if v is an increasing function. ____ 19. If the supply is perfectly elastic, then an upward shift of the demand curve will lead to a higher price and a higher quantity in equilibrium. ____ 20. Supply and demand theory shows us that the burden of a sales tax is shared equally by suppliers and demanders whether the tax is collected from the sellers or collected from the buyers. Multiple Choice (total: 30 points; 2 points per...

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