how many units of good X must be given up to receive one more unit of good Y.

1.The relative price of good X in terms of good Y indicates:

A)how many units of good X must be given up to receive one more unit of good Y.

• how many units of good Y must be given up to receive one more unit of good X
• the rate at which the consumer is willing to trade good Y for good X
• the slope of an indifference curve at a point.
• None of the above.

2.Which of the indifference curves on the graph on the next page indicate that the two goods are perfect compliments?

A)A

• B
• C
• D
• E

3.A perfectly elasticdemand for a good indicates that

A)consumers are not at all sensitive to price changes of that good.

• the good is a necessity
• the good is a normal good.
• consumers are infinitely sensitive to price changes of that good.
• none of the above.

4.Which of the following is NOTa property of well-behaved preferences?

A)Preferences are convex

• Preferences are continuous
• Preferences are transitive
• Preferences are concave
• Preferences are reflexive

5.The assumption that more is preferred to less ensures that:

A)indifference curves are thick

• indifference curves cannot slope upward
• indifference curves are straight lines
• indifference curves are concave
• indifference curves are continuous

• All of the following statements about indifference curves are true when preferences are well-behaved except:

• The Hicksian substitution effect indicates

• the change in quantity demanded associated with a change in income, holding utility constant
• the change in quantity demanded associated with a change in income
• the change in quantity demanded associated with a change in relative prices

B)the change in quantity demanded associated with a relative price change, holding utility constant

E)none of the above8.For an inferior good, a Marshallian consumer demand function is relatively more _________ than a Hicksian Compensated consumer demand function___________________________.

A)elastic; because income is not held constant along the Marshallian consumer demand function

• inelastic; because income is not held constant along the Marshallian consumer demand function
• inelastic; because utility is held constant along the Hicksian Compensated consumer demand function
• elastic; because income is held constant along the Hicksian Compensated consumer demand function
• none of the above

9.Which of the following utility functions represents quasi-linear preferences:

A)U(X,Y) = X + Y

• U(X,Y) = X*Y
• U(X,Y) = X² + Y
• U(X,Y) = X² + Y²
• None of the above

10. Equivalent variation is

• the willingness to pay to avoid a price increase
• the willingness to pay for a price decrease
• the willingness to accept in place of experiencing a price decrease
• the willingness to accept in place of experiencing a price increase
• A and C

[45] Part II: Analytical Questions (5 points each)

 

For questions 11-19 assume that a consumer maximizes his/her utility, S.T. their budget constraint by purchasing good X and good Y. P_x= the price of good X; P_y= the price of good Y; and M = income

• Given the consumer has the following utility function U(X,Y) = X^1/5Y^4/5find the (Marshallian) consumer demand functions for good X and good Y.
• If P_x= $2 and P_y=$4 then the relative price of good X in terms of good Y is:
• If Px increases to $4, then X₂* = 10; Y₂* = 40; U₂*(.) = 20, and ₁=₁= 80 ; the compensating variation would be approximately
• If Px increases to $4 then X₂* = 10; Y₂* = 40; U₂*(.) = 20, and ₁=₁= 20 then the equivalent variation would be approximately

• X* = (4/5)*(M/Px) and Y* = (1/5)*(M/Py)
• X* = (1/5)*(M/Px) and Y* = (4/5)*(M/Py)
• X* = (1/2)*(M/Px) and Y* = (1/2)*(M/Py)
• X* = (1/3)*(M/Px) and Y* = (2/3)*(M/Py)
• None of the above

12.If the (Marshallian) consumer demand functions are: X* = (4/5)*(M/Px) and Y* = (1/5)*(M/Py)

and P_x= $2, P_y=$1 and M = $200, how many units of good X^*and good Y^*will maximize this consumers

utility S.T. the budget constraint?

A)X* = 40; Y* = 160

• X* = 4; Y* = 16
• X* = 80; Y* = 40
• X* = 16; Y* = 4
• None of the above

A)2 units of good Y

• $2
• 1/2 unit of good Y
• $4
• 4 units of good X

14.Given the consumer has the following utility function U(X,Y) = X^1/5Y^4/5 find the Hicksian Compensated consumer demand functions for good X and good Y.

A)X_HC= 0.33*(Py/Px)^4/5* and Y_HC= 1.32*(Px/Py)^1/5*

B)X_HC= 1.32*(Px/Py)^1/5* and Y_HC= 0.33*(Py/Px)^4/5*

C)X_HC= (1/5)*(Py/Px)^4/5* and X_HC= (4/5)*(Px/Py)^1/5*

D)X_HC= (4/5)*(Py/Px)^4/5* and X_HC= (1/5)*(Px/Py)^1/5*

E)None of the above

Use the following Hicksian Compensated consumer demand functions for good X and good Y to answer questions15-17:

= [2/3(P_y/P_x)]^3/5* and = [3/2(P_x/P_y)]^2/5*

15.What is the Hicksian Compensated quantity demanded for good X (X_HC) and good Y (Y_HC) if Px = $2, Py = $2, and (.)= 51?

• X_HC= 40 ; Y_HC= 60
• X_HC= 6; Y_HC= 4
• X_HC= 60; Y_HC= 40
• X_HC= 0 ; Y_HC= 100
• None of the above

16.What is the Hicksian Compensated quantity demanded for good X (X_HC) and good Y (Y_HC) if Px = $2, Py = $1, and U ̅(.)= 51?

A)X_HC= 64.4 ; Y_HC= 56.1

B)X_HC= 60.8; Y_HC= 45.5

C)X_HC= 26.4; Y_HC=79 .1

D)X_HC= 50 ; Y_HC= 25

E)None of the above

17.What is the Hicksian substitution effect for good Y when the price of Y decreases from $2 to $1?

• 60
• 79.1
• 0
• -19.1
• 19.1

 

For questions 18 and 19: Px = $1; Py = $1; M=$80; 40 X₁* = 40; Y₁* = 40; and U₁*(.) = 40

A)$10

• $60
• $80
• $5
• None of the above

A) $36

• $40
• $80
• $0
• None of the above

 

 

[25] Part III: Analytical Questions (5 points each): Use the graph on the following page

Px = price of good X; Py = price of good Y; and M = income

20.Which demand curve represents the Marshallian consumer curve?

A)d_A

B)d_B

C)d_c

D)both d_Band d_c

E)all the demand curves are Marshallian demand curves

21.The Hicksian Compensated demand function with utility level U(.) = ₀is

A)d_A

B)d_B

C)d_c

D)both d_Band d_c

E)all the demand curves are Marshallian demand curves

22.When the price of good X rises from Px to Px’ the compensating variation is:

• ⌂ABCF
• ⌂PxPx’AF
• ⌂PxPx’AC
• ⌂PxPx’BC
• ∆ABC

23.When the price of good X rises from Px to Px’ the equivalent variation is:

• M₀– M₁
• M₀– M₂
• Px’- Px
• Py – Px
• None of the above

24.When the price of good X rises from Px to Px’ the change in consumer surplus is:

• ⌂ABCF
• ⌂PxPx’AF
• ⌂PxPx’AC
• ⌂PxPx’BC
• ∆ABC