Last Name______________________ First Name___________________________
Intermediate Microeconomics Final [150 points]
Clearly label all graphs for full credit and please write legibly; I cannot grade what I cannot read. Show
your work for full credits. The number of points each question is worth in parentheses.
1. (20) Last year, the price of heating oil was $4 per gallon, and Jennifer purchased 100 gallons
of heating oil. This year, the price of heating oil falls to $3 per gallon while Jennifer's
income is unchanged. Jennifer decides to share her good fortune by giving her retired
father a gift of $100. Consider an indifference curve-budget line diagram with heating
oil on the horizontal axis and "all other goods" on the vertical axis.
(i) (4) Does the price change make Jennifer's budget line flatter or steeper? Justify
(ii) (6) After Jennifer gives the $100 gift, will her new budget line lie above, lie
below, or pass through her initial optimum? Justify your choice.
(iii) (10) Sketch an indifference curve-budget line diagram that illustrates this
situation. This year, will Jennifer be better or worse off than she was last year?
2. (20) The manager of a firm receives an engineering report claiming that an additional hour
of capital would add twice as much output as would an additional hour of labor.
According to the firm's accountants, an hour of capital costs 3 times more than an hour
(i) (6) Is the firm on its expansion path? Why or why not?
(ii) (6) Suppose the firm is under contractual obligations to keep its output at current
levels. What long-run adjustment (if any) should the manager make in the firm's
employment of labor and capital?
(iii) (8) Sketch an isoquant-isocost diagram that illustrates the situation described in
part ii. Label the initial situation "A" and the post-adjustment situation "B." The
scale of your diagram does not need to be accurate.