eco211

Principles of Microeconomics

Mid-Term Test 1

Name:

Collaborations (if any):

Other References (if any):

Instructions:

1. Write the name of every person with whom you have collaborated and describe the form of collaboration (if any).

2. Give the full reference of any source you have used (e.g. book title, author, page or article title, author, website)

for each question separately (if any). 3. Be clear, and substantial in your answers. 4. Write clearly and intelligibly.

5. Submit a printed copy of your answers.

Part I. (80 Points)

Question 1 (40 Points)

There is a sudden arrival of the news that there will be an excess supply of apartments to lease in Miami next year.

Draw the graph of the market for apartment in Miami this year and show the equilibrium outcomes before and after

the arrival of the rumor. (Label the equilibrium before the news as equilibrium 0 and the new equilibrium after the

news as equilibrium 1). Explain.

Question 2 (40 Points). Most studies suggest that the demand for drugs is approximately around 0.5. The US

government spends over $50 billion a year arresting over 1.5 million people and deterring the supply of drugs with

police, prisons, and border patrols. This is in turn increases the cost of smuggling and dealing drugs. Imagine two

possible regimes: a prohibition regime and a non-prohibition regime. (a) Draw a graph of the illegal-drugs market

under the two regimes. (b) Show and compare the drug-seller revenues under the two regimes. Explain.

Part II. (20 Points)

Question 3 (10 Points). A free market in the absence of any government intervention always attains maximum

social welfare. Do you agree or disagree? Explain.

Question 4 (10 Points). The following table shows the distribution of income between three individuals (Red, Blue,

and Green) in five different societies:

Society Red Blue Green Average

A 100 100 100 100

B 240 50 10 100

C 600 600 99 433

D 130 120 110 120

E 1096 102 101 433

(a) Which society would be favored by John Rawls? (b) Which society would be favored by the Utilitarians? (c)

What would Robert Nozick say about moving from society E to society C? (d) What would Vilfredo Pareto say about

moving from society B to society D? Justify your answers.