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

• Given the consumer has the following utility function U(X,Y) = X1/5Y4/5find the (Marshallian) consumer demand functions for good X and good Y.
• If Px= \$2 and Py=\$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 Px= \$2, Py=\$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) = X1/5Y4/5 find the Hicksian Compensated consumer demand functions for good X and good Y.

A)XHC= 0.33*(Py/Px)4/5* and YHC= 1.32*(Px/Py)1/5*

B)XHC= 1.32*(Px/Py)1/5* and YHC= 0.33*(Py/Px)4/5*

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

D)XHC= (4/5)*(Py/Px)4/5* and XHC= (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(Py/Px)]3/5* and = [3/2(Px/Py)]2/5*

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

• XHC= 40 ; YHC= 60
• XHC= 6; YHC= 4
• XHC= 60; YHC= 40
• XHC= 0 ; YHC= 100
• None of the above

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

A)XHC= 64.4 ; YHC= 56.1

B)XHC= 60.8; YHC= 45.5

C)XHC= 26.4; YHC=79 .1

D)XHC= 50 ; YHC= 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)dA

B)dB

C)dc

D)both dBand dc

E)all the demand curves are Marshallian demand curves

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

A)dA

B)dB

C)dc

D)both dBand dc

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

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