PARSONS GWU ECONOMICS 2101 SPRING 2012

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YOUR NAME


ECONOMICS 2101
FIRST MIDTERM EXAMINATION

Answer All Questions. The test has one hundred points. You have one hour and 10
minutes to complete the examination.

(1) Optimization (20 points total)

A farmer has F feet of fencing and wants to choose the rectangular dimensions (W,L) that
will enclose the maximum amount of space for his cattle.

(1A) (5 points) Specify the farmers objective function and his constraint.







(1B) (10 points) Solve the farmers problem using calculus techniques.










(1C) (5 points) Prove using calculus techniques that your solution in (1B) is a
maximum area, not a minimum area.









PARSONS GWU ECONOMICS 2101 SPRING 2012

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(2) Demand Elasticities (20 points total)

Suppose the market for air travel between Chicago and Dallas is served by just two
airlines, United and American. An economist has studied this market and has estimated
that the demand curves for round-trip tickets for each airline are as follows:

0
d
! "#$### -"##P
0
% &&P
A
Uniteds Demand

A
d
! "#$### -"##P
A
% &&P
0
Americans Demand

where P
0
denotes Uniteds price and P
A
denotes Americans price.

(2A) (10 points) Suppose both airlines are charging $300 for a round trip and
United is considering a unilateral price increase (American is not expected to
raise its prices). What is the price elasticity of demand for United flights?










(2B) (10 points) Now imagine that the two airlines collude and agree to raise
prices in concert (same price changes at the same time). What is the
elasticity of demand for flights in this case?


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(3) Deriving a Demand Function (30 points)

Consider a consumer in a static two-good world (x, y). The consumer has a utility
function: U ! x
1
3
y
2
3
, and has an income of I and faces a competitive product market
with prices
!
" and
#
" .

(3A) (10 points) Derive the individuals marginal rate of substitution (MRS)
algebraically? (MRS is the negative of the slope of the indifference curve).














(3B) (10 points) Is the MRS increasing or diminishing in x? Prove your assertion
using calculus methods.


















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(3C) (10 points) Derive the individuals demand curve for x.






































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(4) (30 points) Samantha

Samantha purchases food (F) and other goods (Y) with the utility function:

u ! F

Her income is I and the price of food is P
P
and P

respectively.

(4A) (10 points) Derive algebraically her demand function for food.




















(4B) (10 points) Assume that the government decides that the level of food
consumption by the individual implied by the demand function is insufficient
to maintain good health and wants to calculate the additional income AI it
would have to provide the individual to induce her to demand a healthy level
of food consumption '
H
. What is the formula for AI as a function of the
problem parametersfood consumption goal, income, prices?

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(4C) (10 points) Using the formula derived in (4B) calculate the additional income
AI needed to insure that individuals will consume '
H
! ( when I !"*,
P
P
! * and P

! ".










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