Economics 323 Microeconomic Theory Fall 2016

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1 pink=a FIRST EXAM Chapter Two Economics 33 Microeconomic Theory Fall 06. The process whereby price directs existing supplies of a product to the users who value it the most is called the function of price. a. rational b. invisible c. allocative d. rationing. When rent controls bind, the rent being below equilibrium causes: a. more apartments to be demanded b. fewer apartments to be supplied c. excess demand for apartments d. all of the above 3. The demand curve will shift out for all of the following EXCEPT: a. population grows b. price of a substitute rises c. price of a complement falls d. income increases for a normal good e. income increases for an inferior good 4. The supply curve will shift out for all of the following EXCEPT: a. more firms b. wages fall c. interest rates fall d. higher prices for raw materials e. good weather 5. If good weather leads to a bumper (larger than usual) crop of pumpkins this year, the market will see equilibrium: a. price and quantity rise b. price rise but quantity fall c. price fall but quantity rise --

2 d. price and quantity fall e. no change in price or quantity 6. The supply curve is P = 4Q S and demand is perfectly inelastic at Q D = 0. Before any tax is imposed, the equilibrium price is: a. 0 b. 0 c. 80 d If sellers must pay a tax of $0 per unit, what quantity is exchanged? a. 0 b. 0 c. 80 d And what price will buyers pay? a. 0 b. 0 c. 80 d And what price will the sellers keep (net of paying the tax)? a. 0 b. 0 c. 80 d How is the tax burden distributed across buyers and sellers? a. buyers pay it all b. buyers pay more of the tax than sellers but not all of it c. buyers and sellers each pay half the tax d. sellers pay more of the tax than buyers but not all of it e. sellers pay it all --

3 Chapter Three. Doubling both prices will cause the budget constraint to: a. rotate inward along the axis for candy b. rotate outward along the axis for candy c. shift inward in a parallel fashion d. shift outward in a parallel fashion. Doubling income and both prices will cause the budget constraint to: a. rotate inward along the axis for only one good b. rotate outward along the axis for only one good c. shift inward in a parallel fashion d. shift outward in a parallel fashion 3. The property that preferences are complete means that: a. some bundles cannot be compared at all b. can determine which of any two bundles is preferred or declare that indifferent c. transitivity is guaranteed to be true d. all income is spent 4. Which of the following usual properties of preferences is violated when two goods are perfect substitutes: a. completeness b. more-is-better c. transitivity d. convexity 5. When a consumer optimally chooses a consumption bundle, the MRS equals: a. the ratio of the prices of the goods b. the (absolute value of the) slope of the indifference curve c. the opportunity cost of one good in terms of the other d. all of the above -3-

4 6. With $60/month to spend on dairy milk L at $4/gallon and Silk (soy milk) S at $6/gallon, Bessie s budget constraint is: a. L = 5-6S b. L = 60-6S c. L = S d. L = 5 -.5S 7. The most milk Bessie can afford is gallons (with no Silk). The most Silk is gallons (with no milk). a. 0, 5 b. 5, 0 c. 30, 5 d. 5, Every gallon of Silk that Bessie consumes requires forgoing the consumption of how many gallons of milk? a. / b. /3 c. d. 9. If Bessie views one gallon of Silk as a perfect substitute for one gallon of milk, her best affordable bundle is: a. 5 gallons of milk and no Silk b. 0 gallons of Silk and no milk c. 6 gallons milk and 6 gallons of Silk d. 9 gallons of milk and 4 gallons of Silk 0. If the price of Silk rises to $8/gallon, how much additional income would be needed to afford her original consumption bundle? a. $0 b. $6 c. $ d. $8-4-

5 Chapter Four. What is used to construct an individual's Engel curve? a. a price consumption curve b. an income consumption curve c. the substitution effect of a price change d. the income effect of a price change e. the individual's demand curve. When moving along a linear demand curve toward lower price and higher quantity demanded, the price elasticity of demand goes from: a. elastic to unit elastic to inelastic b. inelastic to unit elastic to elastic c. maintains a constant elasticity d. elastic to inelastic to unit elastic e. unit elastic to elastic to inelastic 3. If coffee and cream are consumed in a fixed ratio, the substitution effect of an increase in the price of coffee is: a. infinite b. one c. zero d. negative e. cannot tell 4. Consumer demand tends to be more price elastic when there are a. few substitutes and have little time to adjust: b. few substitutes and have plenty of time to adjust c. many substitutes and have plenty of time to adjust d. many substitutes and have little time to adjust e. no substitutes at all 5. If the price of X is twice the price of Y, to maximize utility U = 5X + 3Y, best to buy: a. only X and no Y b. only Y and no X c. some of both goods but more of X than Y d. some of both goods but more of Y than X e. insufficient information to determine the answer -5-

6 6. The market demand curve for pumpkins is P = 60 - Q D. At P = $0, total revenue is: a. $00 b. $00 c. $300 d. $ And at P = $0, the price elasticity of demand for pumpkins is: a. -/5 = -0. b. -/5 = -0.4 c. -3/5 = -0.6 d And at P = $0, pumpkin demand is price: a. elastic b. unitary elastic c. inelastic d. spastic 9. And if currently charging P = $0, to increase revenues, pumpkin sellers should: a. increase price b. decrease price c. leave price unchanged d. cannot tell from the information provided 30. At P = $30, pumpkin demand given by P = 60 - Q D is price: a. elastic b. unitary elastic c. inelastic d. spastic -6-

7 Chapter Five 3. For demand given by P = 0 - Q, how much would consumer surplus decline if the price increased from $ to $6? a. 6 b. 9 c. d A tax on gasoline that is fully rebated back to consumers would likely: a. have no effect on demand for gasoline b. reduce demand for gasoline due to the substitution effect c. increase demand for gasoline due to the income effect d. cause consumers to trade in hybrids for SUVs 33. The permanent income hypothesis says current consumption depends mainly on: a. current income b. future income c. the present value of lifetime income d. future consumption 34. If the interest rate rises, the present value of lifetime income: a. rises b. falls c. stays the same d. rises or stays the same e. falls or stays the same 35. Introducing a school voucher system would likely increase spending on education due to eliminating the need to pay: a. taxes to local school districts b. higher salaries to teachers at private schools c. both taxes and tuition when choose a private school d. bonuses based on school performance -7-

8 36. Sam has income of M = M = $300 in each period and faces an interest rate of r = 0%. The maximum George can consume in the current period, if he consumes nothing in the future period, is: a. $550 b. $600 c. $660 d. $ The maximum Sam can consume in the future period, if he consumes nothing in the current period, is: a. $550 b. $600 c. $660 d. $ Sam's intertemporal budget constraint is: a. C + C /(.) = $550 b. C = $660 -.C c. C + C = $600 d. both a. and b. 39. If Sam requires current and future consumption in an exact one-toone ratio (perfect complements), his optimal consumption bundle is: a. $550 in current period, nothing in future period b. $600 in current period, nothing in future period c. $300 in current period, $300 in future period d. nothing in current period, $660 in future period 40. If instead Sam had income M = 0 and M = 660 (with r = 0% and same preferences), his optimal consumption bundle would be: a. $550 in current period, nothing in future period b. $600 in current period, nothing in future period c. $300 in current period, $300 in future period d. nothing in current period, $660 in future period -8-

9 pink=a FIRST EXAM SOLUTIONS Chapter Two Economics 33 Microeconomic Theory Fall 06 d. The process whereby price directs existing supplies of a product to the users who value it the most is called the rationing function of price. d. When rent controls bind, the rent being below equilibrium causes: more apartments to be demanded, fewer apartments to be supplied, and excess demand for apartments so all of the above. 3e. The demand curve will shift out for all of the following EXCEPT: income increases for an inferior good. 4d. The supply curve will shift out for all of the following EXCEPT: higher prices for raw materials. 5c. If good weather leads to a bumper (larger than usual) crop of pumpkins this year, the market will see equilibrium: price fall but quantity rise. 6c. The supply curve is P = 4Q S and demand is perfectly inelastic at Q D = 0. Before any tax is imposed, the equilibrium price is: 80. P = 4Q = 4(0) = 80. 7b. If sellers must pay a tax of $0 per unit, what quantity is exchanged? 0. 8d. And what price will buyers pay? 90 Supply shifts up by 0 to P = 0 + 4Q = 0 + 4(0) = 90. 9c. And what price will the sellers keep (net of paying the tax)? 80 P S = P B - T = 90-0 = 80. 0a. How is the tax burden distributed across buyers and sellers? Buyers pay it all. Chapter Three c. Doubling both prices will cause the budget constraint to: shift inward in a parallel fashion. --

10 e. Doubling income and both prices will cause the budget constraint to: remain unchanged (none of the above). 3b. The property that preferences are complete means that: can determine which of any two bundles is preferred or declare that indifferent. 4d. Which of the following usual properties of preferences is violated when two goods are perfect substitutes: convexity. 5d. When a consumer optimally chooses a consumption bundle, the MRS equals: the ratio of the prices of the goods, the (absolute value of the) slope of the indifference curve, and the opportunity cost of one good in terms of the other so all of the above. 6d. With $60/month to spend on dairy milk L at $4/gallon and Silk (soy milk) S at $6/gallon, Bessie s budget constraint is: L = 5 -.5S. PLL + PSS = M, 4L + 6S = 60 so 4L = 60-6S and thus L = 5 -.5S. 7b. The most milk Bessie can afford is 5 gallons (with no Silk). The most Silk is 0 gallons (with no milk). M/P L = 60/4 = 5, M/P S = 60/6 = 0. 8e. Every gallon of Silk that Bessie consumes requires forgoing the consumption of how many gallons of milk? 3/ =.5 (none of the above). Reading from slope-intercept version of the budget constraint L = 5 -.5S, if increase Silk by gallon, must decrease milk by.5 gallons. 9a. If Bessie views one gallon of Silk as a perfect substitute for one gallon of milk, her best affordable bundle is: 5 gallons of milk and no Silk. The maximum milk she can afford, 5 gallons, is equivalent in satisfaction to her as 5 gallons of Silk. She can only afford 0 gallons of Silk so her best choice is to consume milk. 0a. If the price of Silk rises to $8/gallon, how much additional income would be needed to afford her original consumption bundle? $0 She was consuming onlu milk so she does not need to be compensated at all for the price of Silk rising. Chapter Four b. What is used to construct an individual's Engel curve? an income consumption curve. --

11 a. When moving along a linear demand curve toward lower price and higher quantity demanded, the price elasticity of demand goes from: elastic to unit elastic to inelastic. 3c. If coffee and cream are consumed in a fixed ratio, the substitution effect of an increase in the price of coffee is: zero. 4c. Consumer demand tends to be more price elastic when there are: many substitutes and have plenty of time to adjust. 5b. If the price of X is twice the price of Y, to maximize utility U = 5X + 3Y, best to buy: only Y and no X. X is twice as expensive as Y but yields only 5/3 < times as many utils so Y is the better deal. For example, if M = 30, P X = and P Y =. Buying M/P Y = 30/ = 30 units of Y would yield U(X=0, Y=30) = 5(0) + 3(30) = 90 utils. If instead were to buy all X with M/P X = 30/ = 5, utility U(X=5, Y=0) = 5(5) + 3(0) = 75 would be less than the 90 from buying only Y. 6e. The market demand curve for pumpkins is P = 60 - Q D. At P = $0, total revenue is: $50 (none of the above). At P = $0, 0 = 60 - Q so Q = 50 and Q = 5. TR = PQ = 0(5) = $50. 7a. And at P = $0, the price elasticity of demand for pumpkins is: å = (P/Q)(/slope) = -(0/5) (½) = -/5 = c. And at P = $0, pumpkin demand is price: inelastic as less than one in magnitude (absolute value). 9a. And if currently charging P = $0, to increase revenues, pumpkin sellers should: increase price as a % increase in price will cause a less than % decrease in quantity demanded. 30b. At P = $30, pumpkin demand given by P = 60 - Q D is price: unitary elastic. At P = $30, 30 = 60 - Q so Q = 30 and Q = 5. å = (P/Q)(/slope) = -(30/5) (½) = -. Chapter Five 3c. For demand given by P = 0 - Q, how much would consumer surplus decline if the price increased from $ to $6? At P =, = 0 - Q, Q = 8 so Q = 4. At P = 6, 6 = 0 - Q, Q = 4 so Q =. ÄCS = -(P - P )(Q + Q )/ = -(6 - ) (4 + )/ = -4(3) = -, or CS = (0-)4/ = (8) = 6, CS = (0-6)/ = 4, ÄCS = 4-6 =

12 3b. A tax on gasoline that is fully rebated back to consumers would likely: reduce demand for gasoline due to the substitution effect. 33c. The permanent income hypothesis says current consumption depends mainly on: the present value of lifetime income. 34b. If the interest rate rises, the present value of lifetime income: falls. 35ce. Introducing a school voucher system would likely increase spending on education due to eliminating the need to pay: both taxes and tuition when choose a private school. 36a. Sam has income of M = M = $300 in each period and faces an interest rate of r = 0%. The maximum George can consume in the current period, if he consumes nothing in the future period, is: $550 C + C /( + r) = M + M /( + r), C = /. = $ c. The maximum Sam can consume in the future period, if he consumes nothing in the current period, is: $ d. Sam's intertemporal budget constraint is: C + C /(.) = $550 or C = $660 -.C so both a. and b. 39c. If Sam requires current and future consumption in an exact one-toone ratio (perfect complements), his optimal consumption bundle is: $300 in current period, $300 in future period. 40c. If instead Sam had income M = 0 and M = 660 (with r = 0% and same preferences), his optimal consumption bundle would be: $300 in current period, $300 in future period (same intertemporal budget constraint as before). -4-

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