MICROECONOMICS

1. Short Answer Questions
1. Which of the following statements indicate a positive analysis and which indicate a normative analysis?
Explain your answer in each case.
(a) To provide revenues for public schools, taxes on alcohol, tobacco, and gambling casinos should
be raised instead of increasing income taxes.
(b) The added value of above-average kindergarten teacher on his/her students’ lifetime earnings
equals $320,000 per student.
(c) Providing universal healthcare should be a priority for the federal government.
(d) If cable companies are required to offer consumers the option to purchase channels a la carte
instead of in a bundle, the price of cable service will fall.
(e) A carbon tax imposed in Finland reduced the growth of its per capita CO2 emissions.
2. Name an example of each of the following:
(a) Goods that are provided centrally, by the government.
(b) Goods that are provided by firms operating in decentralized markets.
(c) Goods that are provided both centrally by the government and by firms operating in decentralized
markets.
(d) Goods that are provided through decentralized procedures other than via markets with prices.
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2. Supply and Demand
1. Using diagrams, analyze which changes in price and quantity would be expected under the scenarios
given in the following markets:
(a) Fruit: A new technology for growing apples more efficiently is developed and adopted by all
apple orchards.
(b) Airline fares: A weakening of the dollar makes hotels and leisure activities cheap for Europeans
traveling in the United States.
2. Suppose ideal spring weather creates an extraordinarily large crop of high quality oranges.
(a) What does this do to the equilibrium price and quantity of orange juice?
(b) Suppose that apple juice is a substitute for orange juice. What impact does your answer in (a)
have on the equilibrium price of apple juice?
3. The demand for some good x is estimated to be
ln(Qx) = 10 − 4ln(Px) + 4ln(M)
where Qx and Px are the quantity and price of good x and M is income. What impact does an
increase in income (M) have on the equilibrium price and quantity of good x? (Increase, decrease,
uncertain). Explain.
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3. Math Review Questions
1. What is the partial derivative, ∂f
∂x and ∂f
∂y of:
(a) f(x, y) = 2y
3 + 4x
4
.
(b) f(x, y) = 5x
2y
5
.
(c) f(x, y) = ln(x) + 1
4
y
2
2. Consider the following functions. Graph them, and include labels on the axes and show at what q
and p values the function intersects the axes.
(a) q(p) = 8 − 2p
2
.
(b) 5p − 20 = 10q + 3p.
3. The following functions need to be maximized. Show (i) the first-order conditions i.e. ∂f
∂x = 0 and
∂f
∂y = 0 and (ii) solve them for x and/or y:
(a) f(x) = 20 − 4x
2
(b) f(y) = 10 + 9y −
1
3
y
3
(c) f(x, y) = −2(3x − 15)2 − 10(5 − y)
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