Test 1 Economics 321 Chappell September 27, 2007 Name Last 4 digits SSN Answer multiple choice questions on the form provided. Be sure to write our name and last 4 digits of our social securit number on that form, and fill in the grid for the last 4 digits. Answer the analtical questions in the space provided on this test sheet. Multiple Choice: 17 questions @ 3 points each; 51 points total Analtical Question 1: 15 points Analtical Question 2: 15 points Analtical Question 3: 20 points 101 total points
Multiple Choice (3 points each). 1. If demand is elastic, an increase in price: A) Will increase total revenue. B) Will decrease total revenue. C) Will have an indeterminate effect on total revenue. D) Will decrease total profit. 2. Which of the following is NOT assumed about a consumer s preferences? A) references are complete. B) A consumer s preferences change when she has more income. C) references are transitive. D) A consumer prefers bundle A to bundle B is bundle A has more of all goods. 3. Which of the following is NOT a propert of a consumer s indifference curves? A) Indifference curves do not intersect. B) Indifference curves are thick. C) Indifference curves are downward sloping. D) An indifference curve farther out from the origin is associated with a higher level of utilit. 4. A simultaneous increase in both suppl and demand will A) Increase the equilibrium price. B) Decrease the equilibrium price. C) Increase the equilibrium quantit. D) Decrease the equilibrium quantit. 5. Which of the following statements best illustrates the law of demand? A) When the price of pepperoni rises, the demand for pizza falls. B) When the weather gets hotter, the quantit demanded of ice cream rises. C) When the price of lemons falls, the demand for lemonade rises. D) When the price of eggs rises, the quantit demanded of eggs falls. 6. Along a linear demand curve, as price falls A) The elasticit of demand is constant. B) The elasticit of demand falls. C) The elasticit of demand increases. D) The elasticit is the same as the slope of the demand curve. 7. Suppose the cross-price elasticit for two goods is negative. The two goods are A) Normal goods. B) Substitutes. C) Complements. D) Inferior goods.
8. If a consumer's preferences are quasi-linear, then the consumer's indifference curves will be A) Straight lines. B) L-shaped. C) Concave to the origin. D) arallel. 9. Suppose all prices double and income triples. The budget line A) Will become steeper. B) Will become flatter. C) Will shift in toward the origin. D) Will shift out from the origin. 10. If a consumer purchases two goods, peanut butter (measured along the ais) and tetbooks (measured along the ais), and if the price of peanut butter is $3 and the price of tetbooks is $40, then what is the slope of the consumer's budget constraint if the consumer has an income of $120? A) 120/40. B) 120/3. C) 40/3. D) 3/40. 11. The slope of a consumer s budget line is given b: p A). p B) p. p C). D) Both A) and C) are correct. 12. Suppose the price of good A is $4, the price of good B is $2, and that the consumer is currentl spending all available income. At the consumer's current consumption basket the marginal utilit of A is 5 and the marginal utilit of B is 3. Which statement below is correct? A) The consumer is currentl maimizing utilit. B) The consumer could increase utilit b consuming more of good A and less of good B. C) The consumer could increase utilit b consuming more of good B and less of good A. D) Nothing can be said about the consumer's utilit because we do not know the consumer's income or utilit function.
13. If a consumer states that he is indifferent between receiving a gift certificate for $20 at the local pizza parlor and receiving $20 cash, we can infer that this consumer A) Would spend less than $20 at the pizza parlor. B) Would spend at least $20 at the pizza parlor. C) Would spend more than $20 at the pizza parlor. D) Would spend eactl $20 at the pizza parlor. 14. Suppose when the consumer's income rises b 20%, the consumer's consumption of good falls b 10%. We can infer that good is a(n) A) Normal good. B) Inferior good. C) Giffen good. D) Marginal good. 15. Suppose that the price of good rises. Further, suppose that a consumer is compensated so that after the price increase, he is able to attain the same utilit level that he had before the price change. The amount of income that would be paid to this consumer is called: A) The equivalent variation. B) The compensating variation. C) The change in consumer surplus. D) All of the above. 16. Under what circumstances is a consumer s demand curve for a good upwardsloping? A) When the good is a normal good. B) When the good is an inferior good and the substitution effect outweighs the income effect. C) When the good is an inferior good and the income effect outweighs the substitution effect. D) Both a) and b) are correct. 17. Consumer surplus is measured b: A) The area above the suppl curve, below the market price, and out to the quantit sold. B) The area below the demand curve, below the market price, and out to the quantit sold. B) The area below the demand curve, above the market price, and out to the quantit sold. D) None of the above.
Analtical Question 1 (15 points) The diagram below shows two indifference curves for an individual. Although the diagram shows that two indifference curves intersect, according to the assumptions our theor makes about individual preferences, this is NOT possible. Carefull eplain wh the diagram below implies a violation of one (or more) assumptions we have made to characterize consumer preferences. You ma add to the diagram as needed to eplain our reasoning.
Analtical Question 2 (15 points) oint A in the diagram below is NOT a consumer optimum. At point A, one of the following conditions holds: > = < 1) Which of those conditions holds at point A? 2) How does that condition help to eplain how the consumer should modif his consumption bundle at point A to attain higher utilit. A
Analtical Question 3 (20 points) The diagram below illustrates a consumer s optimal choice of a bundle of goods X and Y. 1) Suppose that the price of good X triples. Show what happens to the consumer s budget line. 2) Now use (and add to) the diagram to illustrate the income and substitution effects of the price increase. Label these effects clearl. 3) Define the term compensating variation and use the diagram to illustrate the magnitude of the compensating variation for this price increase. Eplain wh the distance or area ou indicate on the diagram is a measure of the compensating variation.