Dr. Barry Haworth
University of Louisville
Department of Economics
Economics 301

Practice Problems: Midterm #1

1. Suppose the government is concerned about gas shortages and so places a quota on gas purchases. Before the quota, consumers are able to purchase as much as 12 gallons of gas per week. The quota reduces this amount to no more than 10 gallons per week. How are (typical) consumers affected by this quota?

2. After June 1st, Louisville-area (Jefferson County) gas stations are required to sell reformulated gasoline, which is about 20 cents more expensive than non-reformulated gas. Gas stations in neighboring Oldham, Shelby and Bullitt Counties are not required to sell this gas. How does this regulation affect consumers who live on the border of Jefferson and Shelby County?

3. Assume that a local politician is running for office. To appease soccer Moms (an important voting block), this politician creates a program for Louisville-area soccer Moms, allowing them to receive a monthly gas voucher that's good for 20 gallons of (free) gas. Assume further that soccer Moms receive about $200 in monthly income, that gas prices are $2 per gallon and that a price index for "all other goods" is equal to $4.

Consider the following two groups of soccer Moms (let G = quantity of gas purchased and A = quantity of all other goods purchased).

Soccer Moms in group 1 have this utility function: U = G0.5A0.5

(note that their MRSGA = -A/G)

Soccer Moms in group 2 have this utility function: U = G0.1A0.9

(note that their MRSGA = -A/(9G))

Note that receiving a 20 gallon voucher is similar to obtaining a $40 increase in income. With this in mind, compare how this voucher program affects each of these two groups, and then determine whether each group prefers the voucher program to an alternative program that just provides a monthly $40 check to soccer Moms.