Midterm: Fall 1998  
Name: ______________________________                                            Exam number: ______

Greetings. Please write your name on the line above and write your exam number but NOT your name on the cover of your blue book AND on you Supplementary Worksheet. You must turn in your test copy AND your blue book AND your Supplementary Worksheet to receive a passing grade for the exam.

Please answer each of the exam questions as well as you can. Available exam points are distributed in proportion to the recommended time limits listed in the exam. The recommended times sum to 50 minutes, but you will be given 55 minutes to complete the exam. Do the best you can on each question, and keep in mind that plenty of partial credit is available.

Don't forget the Oxy spirit of honor. Please do NOT discuss this exam AT ALL until 12:30 this afternoon. Good luck!

    1. (8 minutes) Answer any one of the Cooperative Learning Lab (CLL) questions on the page attached to the end of this exam.

    2. (8 minutes)
    a. Decide whether the following is true or false, and briefly explain your answer: If quantity demanded for a product falls when the price rises, then demand must be elastic.
    b. If price rises by 30% and total revenue rises by only 10% then demand is (1) elastic. (2) inelastic. (3) unit elastic. Explain briefly.
    c. Two drivers--Tom and Jerry--each drive up to a gas station. Without looking at the price, each places an order. Tom says, "I'd like 10 gallons of gas." Jerry says, "I'd like $10 of gas." What is the value of each driver's price elasticity of demand? Explain briefly.

    3. (6 minutes)
    a. When studying the "Microeconomic Role of Government," we covered two major types of problems which can arise in product markets under free-market conditions. List and/or briefly describe them.
    b. In well-functioning product markets, taxes reduce efficiency. Under what circumstances, if any, can taxes in a product market increase efficiency instead? Explain briefly.
    c. In well-functioning product markets, price ceilings reduce efficiency. Under what circumstances, if any, can a price ceiling in a product market increase efficiency instead? Explain briefly.

    4. (10 minutes)
    a. Diagram an initial supply and demand equilibrium in the market for renting apartments. Use the label "Qa" to indicate the initial quantity of apartments rented.
    b. Depict the consequences of rent controls designed to "make apartments more affordable" for tenants. Be sure to label (1) the new quantity of apartments rented out (Qb), (2) the shortage of apartments, and (3) the minimum welfare loss compared to a free-market equilibrium.
    c. Suppose the rent controls are replaced by a rent subsidy which lowers the rental price for tenants to the same level as the former price ceiling. Label (1) the new quantity of apartments rented out (Qc), (2) the cost of the subsidy program to the government, and (3) the resulting welfare loss compared to a free-market equilibrium.

    5. (18 minutes) Use the diagrams on the Supplementary Worksheet to help you answer the questions associated with each of the following markets. Put all of your answers directly on the work sheet.
    a. The market for cigarettes. The U.S. government administers two program that affect the market for cigarettes. (1) Media campaigns and labeling requirements are aimed at making the public aware of the dangers of cigarette smoking. (2) The Department of Agriculture maintains a price support program for tobacco farmers, which raises the price of tobacco above the equilibrum price.
    b. The market for vaccinations.
    c. The market for gasoline. In the diagram Q1 indicates the output level with a pre-existing tax (t1) on gasoline, and Q2 indicates the output level when the gasoline tax is increased to level t2.