ECON 310 Spring 2007 (ticket #15619) Exam 1 - Version A

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1 ECON 30 Spring 007 (ticket #569) Exam - Version A Name: Multiple Choice: (4 points each) ) The income elasticity of demand for margarine is This value suggests that a. a slight increase in the price of margarine would increase total consumer expenditures on margarine. b. butter is a substitute for margarine. c. margarine is an inferior good. d. margarine is a normal good. e. More than one, perhaps all, of the above answers must be correct. ) An Engel Curve a. directly illustrates the relation between the amount purchased of a commodity and it s own price, holding constant income and all other prices. b. directly illustrates the relation between the amount purchased of a commodity and the level of income, holding constant all prices. c. will be negatively sloped for a normal good. d. is the same thing as a demand curve. e. More than one, perhaps all, of the above answers is correct. 3) Chad s preferences over beer and pretzels are monotonic. This means that a. if A f B and B f C, then A f C. b. the bundle A = (4,0) must be more desirable than the bundle B = (,5). c. given a choice between any two consumption bundles, he is able to say which one he prefers. d. more is better, in that increased consumption of all goods would make him better off. 4) If the Law of Demand holds, then a. the corresponding demand curve will be upward sloping. b. in equilibrium there will be excess demand. c. there is an inverse relation between price and quantity demanded. d. consumers are clearly NOT maximizing utility. 5) Rory s marginal utility for pizza a. provides a measure of how his utility changes as he consumes more pizza (with consumption of all other goods fixed). b. provides a measure of the degree to which he would substitute tacos for pizza. c. must be negative if his preferences are transitive. d. must be equal to zero if his preferences are monotonic.

2 6) Consider a market in which demand is given by the function D( p) = 90 p and supply is given by the function S( p) = 4 p. In equilibrium a. 5 units will be traded. b. 60 units will be traded. c. trade will take place at a price of $5 per unit. d. there is excess supply. e. More than one of the above answers is correct. 7) Michelle has income of I = 50, which she devotes to consumption of x and x. Each unit of x costs 3 x costs 5. If her income were to decrease to I = 5 (with prices fixed), then her budget line would a. shift outward. b. shift inward. c. become steeper. d. become flatter. e. More than one of the above answers is correct. 8) A good economic model a. should match the real world exactly. b. should never contain any exogenous variables. c. should never contain any endogenous variables. d. is not useful for making insights into how the real world functions. 9) Consider the market for Los Angeles Clippers basketball jerseys. Between 005 and 007 equilibrium price and equilibrium quantity in this market both increased. Which of the following are possible explanations of this observed change in equilibrium? a. An increase in Demand, with no change in Supply. b. A simultaneous decrease in Demand and decrease in Supply. c. A simultaneous increase in both Demand and Supply. d. An increase in Supply, with no change in Demand. e. More than one of the above explanations is possibly correct. 0) Suppose the price of good one decreases, with income and all other prices fixed. The Compensating Variation in Income a. is equal to the amount of money that could be taken away from the consumer after the price decrease, so that she is exactly as well-off as she was before the price change with her actual income. b. is equal to the amount of additional income that the consumer would have to be given in place of the price decrease, so that she would be exactly as well-off as she is after the price decrease with her actual income. c. must always be exactly equal to the change in Consumer s Surplus brought about by the price decrease. d. is equal to the area below the demand curve but above price paid over all units of the good which are consumed. e. More than one of the above answers is correct.

3 ) Jason likes both x = (peanut butter) and x = (strawberry jam). He always gets the same additional satisfaction from two more ounces of peanut butter as he does from one more ounce of strawberry jam. Which of the following utility functions is consistent with these preferences? a. U ( x, x ) = xx b. U ( x, x ) = x + x U x, x = min x, x c. ( ) { } d. U ( x, x ) = x + x e. Any of the above utility functions is consistent with the stated preferences. ) When the price of pizza decreases from p = to p ˆ = 0 Joe s monthly consumption increases from q = 5 to q ˆ = 9. When decomposing this change into a Substitution Effect and an Income Effect, we see that the Substitution Effect results in a 3 unit increase in his consumption of pizza. From this information, we know that a. pizza is a normal good for Joe. b. pizza is a Giffen good for Joe. c. the Income Effect results in a 4 unit increase in his consumption of pizza. d. the Income Effect results in an 7 unit increase in his consumption of pizza. e. More than one of the above answers is correct. 3) The value of Indirect Utility should a. increase if the price of good one were to increase. b. decrease if the price of good two were to increase. c. increase if income were to increase. d. All of the above answers are correct. e. More than one, but not all, of the above answers is correct. 4) In a Constrained Optimization Problem, the Objective Function refers to a. the relationship that the decision maker wants to maximize or minimize. b. the set of restrictions on the choice of the decision maker. c. the variables which the decision maker gets to choose the value of. d. an analysis which examines how equilibrium values change as a result of changes in exogenous factors. e. a stable state, that will persist as long as factors exogenous to the system remain unchanged. 5) Which of the following is an example of Comparative Statics Analysis? a. Using Supply and Demand analysis to determine the equilibrium quantity of trade which will result in a competitive market. b. Solving a consumer s utility maximization problem, in order to determine the best consumption bundle. c. Determining the price along a linear demand curve at which demand is unit elastic (in order to determine where along the curve Total Consumer Expenditures are largest). d. Explaining how the equilibrium price and equilibrium quantity will change in the market for tennis rackets, in response to an increase in the price of tennis balls. e. None of the above are examples of Comparative Statics Analysis.

4 6) The cross-price elasticity of demand for Good X with respect to the price of Good Y is equal to From this value we can infer that a. an increase in consumer income will lead to an increase in demand for Good Y. b. the cross-price elasticity of demand for Good Y with respect to the price of Good X must be negative. c. an increase in the price of Good X will lead to an increase in Total Consumer Expenditures on Good X. d. an increase in the price of Good Y will lead to an increase in demand for Good X. 7) The critically acclaimed movie Borat Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan was released on DVD on March 6, 007. Demand for this DVD in the San Fernando Valley could be summarized by the linear inverse demand function P D ( q) = q. In this market a. demand is unit elastic at a price of $0 per DVD. b. zero units would be purchased at a price of $40 per DVD. c. Total Consumer Expenditures are maximized when 0,000 units are purchased. d. All of the above answers are correct. e. More than one, but not all, of the above answers is correct. 8) Michael s preferences over cheese and salami are convex. He likes 4 ounces of cheese and ounces of salami exactly as much as 8 ounces of cheese and 8 ounces of salami. It follows that a. he must like ounces of cheese and ounces of salami more than either of these two initial bundles. b. he must like ounces of cheese and ounces of salami less than either of these two initial bundles. c. he must like 6 ounces of cheese and 0 ounces of salami more than either of these two initial bundles. d. he must like 6 ounces of cheese and 0 ounces of salami less than either of these two initial bundles. e. None of the above answers is correct. 9) A consumer s Marginal Rate of Substitution, MRS,, a. is equal to the rate at which the consumer will give up one good to get more of another, holding the level of utility constant. b. is equal to the ratio of marginal utilities between the two goods in question (that MU is, MRS, = ). MU c. must be Diminishing (that is, will get closer to zero as consumption of good one is increased and consumption of good two is decreased, while keeping utility constant) if preferences are convex. d. will increase as income is increased (with prices held constant). e. More than one, perhaps all, of the above answers are correct.

5 0) In microeconomics, the term refers to the amount by which a dependent variable changes as a result of increasing the value of an independent variable. a. total b. average c. marginal d. optimization. e. demand. ) Noel consumes two good, cigarettes and alcohol. His Income Consumption Curve is positively sloped. This implies a. cigarettes are a Giffen good for Noel. b. cigarettes are an inferior good for Noel. c. alcohol is a normal good for Noel. d. Noel s Income Elasticity of Demand for cigarettes must be negative. e. More than one, perhaps all, of the above answers is correct. ) Shoes are a normal good for Liam. If the price of shoes decreases, then a. Liam will buy fewer pairs of shoes. b. Liam s Compensating Variation in Income must be exactly equal to the change in his Consumer s Surplus (that is, CV = ΔCS ). c. Liam s Equivalent Variation in Income must be greater than the change in his Consumer s Surplus (that is, Δ CS < EV ). d. the Income Effect will lead him to decrease his consumption of shoes. e. More than one, perhaps all, of the above answers is correct.

6 Short Answer Question:. Nick s utility is given by U ( x, x ) = xx. It follows that his marginal utility for good one is MU = x and his marginal utility for good two is MU = x. He has income of I ; each unit of good one costs p, and each unit of good two costs p. Based upon this information, answer the following: a. State an expression for MRS,. ( points) b. State the equation for his budget line. ( points) c. Graphically illustrate the solution to his Utility Maximization Problem. (4 points) d. Showing all work, solve his utility maximization problem (that is, determine his best level of consumption of good one and his best level of consumption of good two, each as a function of prices and income). (4 points)

7 Extra Credit! Consider a consumer with utility given by ( X ) 0[ min{ x, x, x3} ] determine the function form of Indirect Utility for this consumer (that is, V ( p p, p, I ) points) U =. Showing all work,, 3 ). (4

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