Economics 323-506 EXAM 2 Part 1: Multiple Choice and Short Answer Problems

March 8, 2005

1. A consumer prefers market basket A to market basket B, and prefers market basket B to market basket C. Therefore, A is preferred to C. The assumption that leads to this conclusion is: a. transitivity. b. completeness. c. all goods are good. d. diminishing MRS. e. assumption of rationality.

2. Indifference curves are convex to the origin because of: a. b. c. d. e. transitivity of consumer preferences. the assumption of a diminishing marginal rate of substitution. the assumption that more is preferred to less. the assumption of completeness. None of the above.

3. Envision a graph with meat on the horizontal axis and vegetables on the vertical axis. A strict vegetarian would have indifference curves that are: a. vertical. b. horizontal. c. diagonal straight lines. d. right angles. e. upward sloping.

4. Refer the table shown below. If preferences satisfy all four of the usual assumptions:
Food A B C 6 8 5 Clothing 3 5 8

a. b c. d. e.

A is on the same indifference curve as B. B is on the same indifference curve as C. A is preferred to C. B is preferred to A. Both (a) and (b) are correct

5. Refer the table shown below. Which of the following cannot be true?
Food A B C 15 13 14 Clothing 18 19 17

a. b. c. d.

The consumer could be indifferent between A and B. A and C could be on the same indifference curve. The consumer could be indifferent between B and C. A and C could be on different indifference curves.

6. If Jill's MRS of popcorn for candy is 2 (popcorn is on the horizontal axis), Jill would willingly give up: a. b. c. d. 2, but no more than 2, units of popcorn for an additional unit of candy. 2, but no more than 2, units of candy for an additional unit of popcorn. 1, but no more than 1, unit of candy for an additional 2 units of popcorn. 2, but no more than 2, units of popcorn for an additional 2 units of candy.

7. If the quantity of good a (Qa) is plotted along the horizontal axis, the quantity of good b (Qb) is plotted along the vertical axis, the price of good a is Pa, the price of good b is Pb and the consumer's income is I, the slope of the consumer's budget constraint is: a. -Qa/Qb b. -Qb/Qa c. -Pa/Pb d. -Pb/Pa e. I/Pa or I/Pb

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8. The endpoints (horizontal and vertical intercepts) of the budget line: a. b. c. d. measure its slope. measure the rate at which one good can be substituted for another. measure the rate at which a consumer is willing to trade one good for another. represent the quantity of each good that could be purchased if all of the budget were allocated to that good. e. indicate the highest level of satisfaction the consumer can achieve. 9. Marginal utility measures: a. b. c. d. e. the slope of the indifference curve. the additional satisfaction from consuming one more unit of a good. the slope of the budget line. the marginal rate of substitution. None of the above.

10. If Px = Py, then when the consumer maximizes utility. a. b. c. d. X must equal Y. MU(X) must equal MU(Y). MU(X) may equal MU(Y), but it is not necessarily so. X and Y must be substitutes.

11. Consider Gary's utility function: U(X,Y) = 5XY, where X and Y are two Goods. If the individual consumed 10 units of X and received 250 units of utility from consuming both goods, how many units of Y must the individual consume? (Show all your work)

12. The curve shown in the diagram is called: a. b. c. d. e. the price-consumption curve. the demand curve. the income-consumption curve. the Engel curve. None of the above.

13. Assume that beer is an inferior good. If the price of beer falls, then the substitution effect results in the person buying __ of the good and the income effect results in the person buying ____ of the good. a. more ... more b. more ... less c. less ... more d. less ... more

14. As the price of the good X increases from $5 to $8, quantity demanded falls from 100 to 80. Based upon this information we can conclude that the demand for X is: a. b. c. d. elastic. inelastic. unit inelastic. insufficient information for judgement.

15. A local retailer has decided to carry a well-known brand of shampoo. The marketing department tells them that the quarterly demand by an average man is Qd = 2 - 0.25 P and the quarterly demand by an average woman is Qd = 4 - 0.6P. The market consists of 10,000 men and 10,000 women. How many bottles of shampoo can they expect to sell if they charge $6 per bottle? (Show your work) a. b. c. d. e. 20,000 33,000 25,000 10,000 None of the above.
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Use the following information in the Scenario shown below to answer questions 16-18. Scenario: The demand curve for the new computer game, Rock and Roll Trivia is as follows: Q = 200 - 5P - 0.1Pc - 0.5Pd +.0.2A - I where Q P Pc Pd A I is the quantity of the computer game demanded is the price of the game is the price of the computer is the price of the diskette is the level of advertising is the level of income

16. Does the demand curve for rock and Roll Trivia slope downward? a. b. c. d. Yes, it does. No it does not. More information is needed to answer this question. It may slope downward, but need not necessarily do so.

17. From this demand curve, one can infer that: a. b. c. d. e. Rock and Roll Trivia is an inferior good. computers and diskettes are substitutes. computers and diskettes are complements. computers are normal good,. (a), (b) and (d) are true.

18. From this demand curve, one can infer that: a. b. c. d. e. an increase in advertising will cause an increase in the demand for Rock and Roll Trivia. Rock and Roll Trivia and computers are substitutes. Rock and Roll Trivia and diskettes are substitutes. All of the above. None of the above.

19. At commodity bundle A, which consists of only apples and oranges, Annette's marginal utility per dollar spent on apples is 10 and her marginal utility per dollar spent on oranges is 8. Diagram a representative budget constraint and indifference curve that passes through bundle A given Annette's budget is exhausted at bundle A. Is Annette maximizing utility? Why or why not? If she is not what could she do to increase her level of satisfaction? Use the following information in the Scenario shown below to answer questions 20-24. Scenario: The demand for erasers (Q) is given as follows: Q = 240 - 4Pe + 2I +Pb + A where Pe I Pb A is the price of erasers is the level of income is the price of another good is the level of advertising

Suppose that Q = 240, Pe = 10, Pb = 10, and A = 2 20. What is the point price elasticity of demand when Q = 240 and Pe = 10? a. -1/3 b. -1/6 c. -1/10 21. It would be correct to say that demand is: a. b. c. d. e. infinitely elastic. elastic, but not infinitely elastic. unit elastic (Ep = -1). inelastic, but not completely inelastic. completely inelastic. d. -1/24 e. -5/24

22. Suppose that the price of erasers increases slightly from $10. How will this affect the total revenue collected by the firm? a. Total revenue will increase. b. Total revenue will not change.
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c. Total revenue will decrease. d. There will be an indeterminate change in total revenue. 23. Given the information in the scenario. Erasers are: a. a normal good. b. an inferior good. c. neither normal nor inferior. d. complements. e. necessities.

24. Given the information in the scenario. Erasers and good b, are: a. substitutes. b. complements. c. completely unrelated. d. normal. e. inferior.

Part 2: Analytical Exercises

Suppose you have a monthly budget of $800, which you spend entirely on X1 and X2 with prices P1 and P2 . Initially P1 is $40, P2 is $20, and you spend $320 per month on X1. In the space provided below answer each of the following questions:
(i) Carefully draw your initial budget constraint and your initial equilibrium consumption point on indifference curve UO. Label this initial equilibrium point A. Now suppose the price of X1 declines from $40 to $25, with M and P2 remaining the constant. (ii) Carefully construct your new budget constraint in the diagram above. (iii) After adjusting to the lower price of X1 , suppose your new equilibrium consumption of X1 is X* = 12 1 per month. Draw your new equilibrium consumption point on indifference curve U1 , and label it point C. (iv) In your new equilibrium at point C, has your monthly consumption of X2 increased, decreased, or remained unchanged? Explain your answer using numbers.

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