Midterm 1 Flashcards
Suppose that commodities x1 and x2 are both goods so that an agent strictly prefers more of each good to less. If consumption bundles (x1, x2) = (4, 10) and (x1, x2) = (16, 3) are on the same indifference curve, which of the following is FALSE?
- The agent is indifferent between bundles (4, 10) and (16, 3).
- The agent prefers the bundle (16, 4) over (4, 10)
- The agent prefers the bundle (16, 3) over (5,10)
- The agent prefers the bundle (4,10) to (15,3)
- The agent prefers the bundle (16, 3) over (5,10)
For a given indifference curve (IDC) for two goods, x1 and x2, describe the strictly preferred set.
(I) All combinations of x1 and x2 that lie above or to the right of the IDC.
(II) All combinations of x1 and x2 that lie on, above, and to the right of the IDC.
(III) All combinations of x1 and x2 that are feasible under the budget constraint.
(IV) All combinations of x1 and x2 that lie on the IDC.
(I) All combinations of x1 and x2 that lie above or to the right of the IDC.
Suppose a consumer is always willing to consume avocados and bananas in a fixed proportion of 1:1, no matter how many avocados or bananas he currently has. This is an example of which kind of indifference curve?
Perfect Complements
Suppose a consumer’s indifference curves are horizontal straight lines. This is an example of preferences where one good is considered a ________________.
Neutral Good
In the context of preferences, convexity means that…
Averages are preferred to extremes
In the context of preferences, concavity means that…
Extremes are preferred to averages
Given the utility function U(x1, x2) = min(x1, x2/2), find the utility of (x1, x2) = (2, 2).
1
Given the utility function U(x1, x2) = x1^(1/2)x2^(1/2) , which of the following does NOT represent a monotonic transformation?
U(x1, x2) = 0.5x1^(1/2)x2^(1/2)
U(x1, x2) = x1x2
U(x1, x2) = x1^(1/2)x2^(1/2) +1
x1^(1/2)x2^(2/3)
x1^(1/2)x2^(2/3)
Given the utility function U(x1, x2) = x1^2+x_2^2 , find the absolute value of the MRS when (x1, x2) = (3,2).
3/2
Suppose a consumer’s preferences are monotonic and her indifference curves are L-shaped. Then at an interior optimum of her consumption choice problem, the marginal rate of substitution is:
Undefined
Suppose a utility function represents perfect substitutes, that is, indifference curves are straight lines. Assume also that the budget constraint line is STEEPER than the indifference curves. There will be a utility-maximizing solution at:
A boundary point on the vertical axis
Suppose a utility function represents perfect substitutes, that is, indifference curves are straight lines. Assume also that the budget constraint line is LESS STEEP than the indifference curves. There will be a utility-maximizing solution at:
a boundary point on the horizontal axis
Given the Cobb-Douglas utility function U(x1, x2) = x1^(1/4)x2^(3/4), find the absolute value of the MRS.
|x2/3x1|
Suppose the utility function is U(x1, x2) = x1^(1/4)x2^(3/4) . Given the budget constraint x1+x2 = m what is the tangency condition for this consumer’s optimization problem?
x2/x1=3
Suppose good 1 and good 2 are normal and good 3 is inferior. Holding prices constant, if income m decreases, how will this affect the optimal bundle (x1, x2, x3*)
x1* and x2* will decrease but x3* will increase
which of the following is the best example of an inferior good?
- a bus ticket
- business class airplane ticket
- über LUX ride
- über XL ride
a bus ticket
Suppose the demand for good x in terms of the price of good x (p_x) the price of good y (p_y) and income (m) is given by:
x = m/(p_x+p_y)
Which of the following is true?
- x is a normal good
- x is an inferior good
- x is a Giffen good
- None of the above
None of the above
Suppose the demand function are given as:
x1* = 1/4 * m/p1
x2* = 3/4*m/p2
BC: p1x1+p2x2 = m
Which of the following statements could be true of the utility function that gave rise to these demand functions?
- It has a Cobb-Douglas form where the exponents of x1 and x2 have a ratio of 3:4.
- It has a Cobb-Douglas form where the exponents of x1 and x2 have a ratio of 1:1.
- It has a Cobb-Douglas form where the exponents of x1 and x2 have a ratio of 1:3.
- It has a linear form where the coefficients of x1 and x2 have a ratio of 1:4.
It has a Cobb-Douglas form where the exponents of x1 and x2 have a ratio of 1:3.
Suppose that there were 25 people who had a reservation price of $500 and the 26th person had a reservation price of $200. What would the demand curve look like?
What would the equilibrium price be if there were 24 apartments to rent?
26 apartments?
25 apartments?
It would be flat at 500 from 0 to 25 then drop off to 200 right at 26.
24 - $500
26 - 200
25 - between 200 and 500
(if it were above 500 nobody would rent and below 200 would result in excess demand)
If people have different reservation prices, why does the market demand curve slope down?
If we want to rent one more apartment we have to offer a lower price.
What would happen to the price of inner-ring apartments if all condo purchasers were outer-ring people - the people not currently renting apartments in the inner ring?
(we previously assumed that condo purchasers came from inner-ring people already renting apartments)
The price of apartments in the inner ring would go up because demand for apartments wouldn’t change but supply would decrease.
Suppose the condo purchasers were all inner-ring people, but that each condo was constructed from two apartments. What would happen to the price of apartments?
The price of apartments in inner ring would rise.
What would the effect of a tax be on the number of apartments built in the long run?
Reduce # of apartments supplied in long-run.
Suppose the demand curve is D(p) = 100 − 2p. What price would the monopolist set if he had 60 apartments? How many would he rent? What price would he set if he had 40 apartments? How many would he rent?
Price = 25
Rent 50 apartments
Rent all 40 at max price market bears:
D(p) = 100-2p = 40
p* = 30
