ECON 2144 C First

ECO2144C(MicroeconomicTheoryI)

MULTIPLECHOICE.

Circletheletterof thechoicethatbest completesthestatementoranswersthequestion. If you

needto change youranswer,veryclearlycrossout yourpreviousanswer,andcircleandputan arrow identifyingthecorrectanswer. If the distinctionbetweenyouroldandnewanswersisnot clear,nopointswillbe awarded.

1. Whentwogoodsaresubstitutes,ashockthatraisesthepriceofonegoodcausesthequantityof theothergoodto

A) increase.

B) remainunchanged.

C) changein anunpredictablemanner. D) decrease.

2. SupposethedemandforDigitalVideoRecorders(DVRs)isgivenbyQ=250-.25p+4pc, whereQisthequantityofDVRsdemanded(in1000s),pisthepriceof aDVR,andpcisthe priceof cabletelevision.HowmuchdoesthequantitydemandedforDVRschangeiftheprisesby$40?

A) increasesby16,000DVRs B) increasesby4,000DVRs C) dropsby10,000 DVRs

D) dropsby2,500 DVRs

3. If thedemandfororangesisgivenbyQ=100-5p,thentheinversedemandfunctionis

A) Q=5p-100

B) p=20-.2Q C) p=20-5Q D) Q=20-.2p

4. Considerthetwodemandfunctions:

i)Qd=250-2P. ii)Qd=300-3P.

Whichofthetwodemandfunctionsreflectsahigherlevel of consumerincome?

A) i

B) ii

C) iandiireflectthesameconsumerincomes. D) Moreinformationisneeded.

5. Theexpression"increaseinquantitysupplied"isillustratedgraphicallyasa

A) leftwardshiftinthesupplycurve.

B) movementupalongthesupplycurve.

C) movementdownalongthesupplycurve. D) rightwardshiftinthesupplycurve.

6. SupposethedemandcurveforagoodisexpressedasQ=50-2p. Ifthegoodcurrentlysells for$3,thenthepriceelasticityofdemandis

A) -3?(2/50). B) -3?(44/2). C) -2?(50/3). D) -2?(3/44).

7. If the priceoforangejuicerises10%,andasaresultthequantitydemandedfallsby8%,the priceelasticityofdemandfororangejuiceis

A) -1.25.

B) inelastic.

C) BothAandBabove.

D) NeitherAnorB above.

8. Consumerswill alwayspaytheentire amountofaspecifictaxwhenever

A) demandisperfectlyinelastic. B) supplyisperfectlyelastic.

C) BothAand Babove.

D) EitherAor Babovebutnot at thesametime.

9. If agovernmentwantstomaximizerevenuesfromatax,itshould

A) imposeitonconsumers. B) imposeitonsellers.

C) chooseagoodwitharelativelyelasticdemand. D) chooseagoodwitharelativelyinelasticdemand.

10. It is appropriatetousethesupply-and-demandmodelif,inamarket, A) costsoftradingarelow.

B) firmssell identicalproducts.

C) everyoneisapricetaker with fullinformationaboutthepriceandqualityofthe good. D) Alloftheabove.

11. If twoindifferencecurvesweretointersectatapoint,thiswouldviolatetheassumptionof

A) completeness. B) transitivity.

C) BothAandBabove. D) None oftheabove.

12. Iftheutilityfunction(U)betweenfood(F)andclothing(C)isrepresentedas = × ,the marginalrateofsubstitutionofclothingfor foodequals

A) -F/C. B) -C/F.

C) - /. D) - /.

13.Themarginalrateoftransformationofyforxrepresents

A) -Px/Py.

B) therateatwhichtheconsumermustgiveupytoget one morex.

C) theslopeofthebudgetconstraint. D) Alloftheabove.

14.Theconsumerisin equilibriumwhen

A) MRT=MRS.

B) thebudgetlineistangenttotheindifferencecurve at thebundlechosen. C) Px/Py=MUx/MUy.

D) Alloftheabove.

15.Amovementupwardalonganupward-slopingEngel curve correspondsto

A) aparallelshiftinthebudgetconstraint. B) crossingindifferencecurves.

C) a rotationinthebudgetconstraint. D) upward-slopingindifferencecurves.

16.Thesubstitutioneffectcanbemeasuredholding_ constant.

A) thepriceof allgoods

B) income

C) thepriceofone good

D) utility

17.Thefactthatconsumersoftenreactmoretochangesinthepostedpriceofagoodascompared to changesinthesalestaxthat isnotpostedis an exampleof

A) salinity.

B) rationalignorance.

C) theendowmenteffect. D) salience.

18.ThefigureaboveshowsBobby'sindifferencemapforjuiceandsnacks. Alsoshown arethree budgetlinesresultingfromdifferent pricesforsnacksassuminghehas$20tospendonthese goods. WhichofthefollowingpointsareonBobby'sdemandcurveforsnacks?

A) p=2,q=10

B) p=1,q=20

C) p=2,q=5

D) p=2,q=13

19. Iftheincomeelasticityofpotatoesis-0.7,thentheincomeeffectcausedbyapricedecreaseof potatoes

A) islessthanthesubstitutioneffect.

B) tendstodecreasethe consumptionofpotatoes. C) tendstoincreasetheconsumptionofpotatoes. D) None oftheabove.

20.AConsumerPrice Index adjustmentovercompensatesforinflationbecauseit ignores

A) that some goodsareinferior.

B) that thesubstitutioneffectmayoffsettheincomeeffect. C) theincomeeffectwhenrelativeprices change.

D) thesubstitutioneffectwhenrelativepriceschange.

TRUE/FALSE.

Forthefollowing,answer"True" or"False"andbrieflyexplainwhy.

21.Theslopeofthebudgetlinerepresentstherateatwhichtheconsumeriswillingto tradeone good foranotheratanygivenbundle.

22.Duringthewinterof1997-1998,eastern Canadaexperiencedwarmerthanusual weatherconditions. The priceofhomeheatingoilwaslessthanitwasduringtheprevious winter,butpeopleboughtlesshomeheatingoil. ThiscontradictstheLawofDemand.

23. IfMRS>MRT,thentheconsumerisbetteroffthanatequilibrium.

SHORTANSWER.

24.Supposethemarketforpotatoescanbeexpressedas follows: Supply: QS=-20 +10p

Demand: QD=400-20p

Solvefortheequilibriumpriceandquantity.

25.David’spreferencesaregivenby , =20. + .

a) WriteDavid’sconstrainedoptimizationproblem. Clearlyindicatetheobjective functionandtheconstraint.

b) Derivethedemandequationsfor and. Assumeprices and incomeare suchthat bothgoodsareconsumedinstrictlypositivequantities.

c) IfDavid’sincomeis$1,000, thepriceof good1is$20perunit,andthepriceof good2is$10perunit,whatisDavid’soptimalbundle?

? ?