SUNY-Stony Brook. Economics Department Economics 303: Fall 2015

SUNY-Stony Brook. Economics DepartmentEconomics 303: Fall 2015Professor Hugo Benítez-SilvaSample Questions for Midterm 2 (Tuesday November 17).(Suggested solutions, except for Q3 will be provided by late Sunday 11/15)Remember that for this midterm you have to study the following chapters wehave covered: Chapter 6 Demand; Chapter 10 Intertemporal Choice; Chapter15 Market Demand; Chapter 16 Equilibrium.1. Mike is a utility-maximizer: his utility function is u(c1,c2) = c11/2c2 1/3. Inflation is 4%and Mike plans to consume equal amounts in periods 1 and 2. What is the interestrate?2. Mark has preferences represented by a utility function U(x1,x2) = x11/3×22/3. Theprices of x1 (cookies) and x2 (soda) are p1 and p2, respectively. Income is equal to Y.Answer the following:(a) What kind of utility does Mark have? Write Mark’s budget constraint and anequality you can use to find Mark’s optimal demand choice for cookies and soda.(b) Derive Mark’s demand function for cookies. Is it a normal or an inferior good?3. Think of your problems as opportunities. (15 points in the exam) This problemwill be in the midterm, so I will not be providing solutions to this part of the samplequestions.Making financial decisions has never been one of Alice’s strengths, so she decides tohire a financial consultant, the only one available is You. We know Alice only caresabout consumption today and tomorrow, and that she will obtain income m1 in period1 and m2 in period 2. Answer the following questions (again, show all your work, itcan make a difference):a) Assume she cannot borrow or lend in any way, and U(c1,c2) = c1*c2; whatwould be your advice regarding her consumption decisions for the two periods ofanalysis?b) Can you draw, level the axis, and level the intercepts of the budget line if shecan borrow or lend at an interest rate of r?c) What is the slope of the budget constraint if the interest rate r is 10%?d) Remembering her utility function from a), and assuming p1=p2=1, interest rateis 10%, and that m1= 100 and m2=115; how much would she consume in period 1,and how much in period 2? (Notice that now the no borrowing, no lendingrestriction has been lifted)4. You have plenty of choices. Please in the exam remember to show your workotherwise no credit will be given.Rino, Giancarlo, and Jason are all buyers of chain saws. Rino’s demand function is Qr=520-13P, Giancarlo’s demand function is Qg=40-P, and Jason’s is Qj=200-5P. Together,these three constitute the entire demand for chain saws.At what price will the price elasticity of market demand be -1? (Hint: Remember theway we said market demand was calculated. Once you obtain it computing theelasticity should be straightforward)(a) 19.(b) 20.(c) 25.(d) 15.(e) Too much information is provided. I am confused.5.Demand and supply for lawn mowers in a small town can be expressed by thefollowing linear functions:D(p) = 40-pS(p)=10+pA) What is the equilibrium price and quantity in this market?B) Imagine the town government restricts the industry to selling only 20 lawnmowers. At what price would 20 lawn mowers be demanded?C) How many lawn mowers would suppliers supply at the price found in B)D) At what price would suppliers supply only 20 units?E) Graph the demand and supply schedule and the effect of the restriction of only 20lawn mowers sold by the local industry. Is there a deadweight loss from thispolicy? If that is the case, can you quantify it?



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