Econ 2310 Midterm, Winter hours, YOU MUST HAND IN THE EXAM. Section A. Each Question is worth 5 marks

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1 Econ 2310 Midterm, Winter hours, YOU MUST HAND IN THE EXAM Section A Each Question is worth 5 marks 1. Suppose the price of good Y rises and the substitution effect and income effect of this of this price change move in opposite directions, then (a) the quantity demanded of good Y will definitely rise (b) the quantity demanded of Y will definitely increase (c) the quantity demanded of Y will definitely stay the same (d) We cannot be certain; the effect on quantity demanded is ambiguous d 2. Suppose the annual demand function for Honda Accord is Q PA 0.002PC, where P A and P C are the prices of the Honda Accord and the Camry respectively. What is the elasticity of demand of the Accord with respect to the price of Camry when both cars sell for $10,000? (a) 2 (b) 5 (c) 4 (d) 1 (e) The demand for a product is A BP, where P is the price and A and B are positive numbers. Suppose that when the price is $2, the amount demand is 50 and elasticity of demand is 2. What is the value of A? (a) 100 (b) 120 (c) 200 Q d 1

2 (d) 150 (e) If indifference curves cross, then the following axiom is violated (a) axiom of continuity (b) axiom of non-satiation (c) axiom of transitivity (d) axiom of satisfaction (e) axiom of completeness 5. With B on the horizontal axis and S on the vertical axis, the slope of an indifference curve associated with the utility function U(B,S) = 4B + 20S is (a) 5 (b) + 6 (c) + 5 (d) 0.2 (e) 2 6. The indifference curve associated with the utility function, U(B,S) = B + S has (a) Constant marginal rate of substitution (b) diminishing marginal rate of substitution (c) decreasing marginal rate of substitution (d) non-monotonic marginal rate of substitution (e) strictly concave marginal rate of substitution 7. Suppose you hire your mechanic for up to six hours. The total benefit and total cost functions are B(H) = 420H 40H 2 and C(H) = 100H + 120H 2, where H is in hours. The corresponding marginal benefit and marginal cost functions are: MB(H) = H and MC(H) = H. What is your best choice: (a) 2 hours (b) 1 hour 2

3 (c) 3 hours (d) 4 hours (e) 6 hours 8. Suppose that Kosmo Kramer's preferences are such that he consumes milk (M) and Honey (H) to always satisfy the formula 2M = H. The price of milk is $2 per unit and the price of honey is $4 per unit. His income is $300. How many units of milk will he consume? (a) 30 units (b) 35 units (c) 50 units (d) 20 units (e) 65 units (f) 10 units 9. The demand for good X is Q d = 100 P and the supply function is Q s = P 10. What is the equilibrium quantity? (a) 50 (b) 30 (c) 55 (d) 90 (e) 60 (f) 45 3

4 10. Which of the following is a normative statement? (a) an increase in the price of fuel will lead to reduction in the demand for cars (b) an increase in the price of cars will lead to a fall in the demand for cars (c) Car makers should not increase the price of cars (d) high levels of corruption reduce tax revenue 11. Suppose the US demand for Canadian maple syrup is Q d = P. At what price is the expenditure on maple syrup by US consumers highest? (a) 30 (b) 50 (c) 40 (d) 70 (e) Suppose that Latanya likes to talk on the telephone. Her utility function is U(B,J, K) = 18 B + 2J + K 2, where B, J, and K are the minutes per conversation per month with Bill, Jackie, and Kevin respectively. If Latanya plans to use the phone for one hour to talk with one person who will she talk to? (a) Kevin (b) Jackie (c) Bill 4

5 Section B 13. (a) Suppose an individual has preferences over consumption, C, and hours of leisure, L, given by U(C,L). The wage rate is w > 0. Let H denote the number of hours of work. Using a diagram, show that an increase in the wage could lead to a fall in the number of hours of worked. 10 marks (b) Carefully explain the intuition for you answer in (a). 10 marks 14. Mantobaye Moundigbaye is a consumer in Lalaland. He consumes only bread, B, and soup, S. Assume that bread and soup can be consumed in any amount (e.g., 1.02 loaves of bread or units of soup is possible). Let P s be the price of soup, P b be the price of bread and $M > 0 be Mantobaye's income. Suppose that he has the usual downward-sloping indifference curves which exhibit diminishing marginal rate of substitution. Draw a diagram showing that his original utility-maximizing bundle is (B*, S*), where B* > 0 and S* > 0. As in class, put bread on the vertical axis and soup on the horizontal axis. Now suppose that soup is rationed, so that Mantobaye cannot consume more than S units of soup, where 0 < S < S*. Relative to his utility at (B*,S*), is Mantobaye better off or worse off? Carefully explain your answer and illustrate it with a diagram. 10 marks March 3, 2012 J. Atsu Amegashie 5