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Economics - Macro Exam Notes

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Economics 212 Section A Midterm Exam October 24, 2000 Question One (20 marks) Jennifer 's preferences for hot sandwiches and cold sandwiches can be represented by U(h,c) = c4h. Prices of hot sandwiches and cold sandwiches are represented by ph and pc. Jennifer 's weekly lunch income is m. A) (5 marks) Find Jennifer 's weekly demand for hot sandwiches. Answer: MRS=- MUc/MUh=-4h/c. (2 marks) Optimality condition: MRS=- pc/ph. --> -4h/c=pc/ph. (1 mark) Substituting this expression into the budget constraint pcc+phh=m, you will find: c=4/5*m/pc, h=1/5*m/ph. (2 marks) B) (5 marks) Jennifer works in an office building with 399 …show more content…

(3 marks) Let c=humberger consumption, r=leisure Budget constraint: 5c+10r=1000 Graph is a straight line on consumption-leisure space, whose slope is –2(=-10/5), the intercept on the horizontal axis is 100, and that of the vertical axis is 200. (2 marks) B) (10 marks) Now Don 's income is taxed at 10%. However, the government promises to refund 10% of his expenditures on food. Write out Don 's new budget constraint. Show this new budget constraint on a new graph, labelling the intercepts and the slope. Answer: Endowment is 100 hours of leisure, and its value=100*9=900. Notice that there is 10% income tax, so the net wage per hour is $9. (4 marks) As there is 10% refund on the food expenditure, the unit cost of hamburger declined to 4.5(=5*.9). (3 marks) Budget constraint: 4.5c+9r=900 Graph is a straight line on consumption-leisure space, whose slope is –2(=-10/5), the intercept on the horizontal axis is 100, and that of the vertical axis is 200. (3 marks) Question Four (20 marks) Terry lives for two periods. In the first period, Terry studies and has an income of $0. In the second period, Terry is employed and earns $40,000. Terry can borrow or lend at an interest rate of 20%. Terry 's preferences for consumption in the first period and consumption in the second period can be described by U(C1, C2) = C1 + C2 . A) (10 marks) Draw Terry 's budget constraint, labelling the

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