1. If Peregrine consumes (1, 400, 1, 210) and earns (900, 1, 760) and if the interest rate is 10%, the present value of his endowment is

a. $2,660.

b. $2,500.

c. $2,610.

d. $5,250.

e. $6,150.

2. If Peregrine in Problem 1 consumes (1, 400, 1, 440) and earns (900, 2, 040) and if the interest rate is 20%, the present value of his endowment is

a. $2,940.

b. $2,600.

c. $5,720.

d. $2,840.

e. $6,620.

3. Suppose that Molly had an income of $500 in period 1 and an income of $250 in period 2. Suppose that her utility function werec^a₁c^1a₂, wherea = 0.60 and the interest rate were 25%. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would

a. double.

b. increase by $300.

c. increase by $150.

d. stay constant.

e. increase by $500.

4. Suppose that Molly had an income of $500 in period 1 and an income of $880 in period 2. Suppose that her utility function werec^a₁c^1a₂, wherea = 0.60 and the interest rate were 10%. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would

a. stay constant.

b. increase by $300.

c. double.

d. increase by $150.

e. increase by $500.

5. Patience has a utility functionU(c₁,c₂) =c^1/2₁ + .080c^1/2₂, wherec₁ is her consumption in period 1 andc₂ is her consumption in period 2. Her income in period 1 is 3 times as large as her income in period 2. At what interest rate will she choose to consume the same amount in period 1 as in period 2?

a. 0.75

b. 0.13

c. 0.25

d. 0

e. 0.38

6. Patience has a utility functionU(c₁,c₂) =c^1/2₁ + .083c^1/2₂, wherec₁ is her consumption in period 1 andc₂ is her consumption in period 2. Her income in period 1 is 5 times as large as her income in period 2. At what interest rate will she choose to consume the same amount in period 1 as in period 2?

a. 0.10

b. 0

c. 1

d. 0.20

e. 0.30

7. Sir Plus has a demand function for mead that is given by the equationD(p) = 100 p. If the price of mead is $85, how much is Sir Plus's net consumer's surplus?

a. 112.50

b. 15

c. 225

d. 56.25

e. 7,650

8. Sir Plus has a demand function for mead that is given by the equationD(p) = 100 p. If the price of mead is $85, how much is Sir Plus's net consumer's surplus?

a. 15

b. 225

c. 56.25

d. 112.50

e. 7,650

9. Roger's utility function isU = min{a₁,a₂} min{b₁,b₂}, where a₁ and a₂ are the number of piano lessons he consumes this year and next andb₁ andb₂ are the number of ice skating lessons he consumes this year and next. The price of piano lessons is $10 each and the price of ice skating lessons is $4 each. The prices won't change, but the interest rate is 7%. If Roger consumes 20 piano lessons this year, how many ice-skating lessons will he consume next year?

a. 50

b. 20

c. 40

d. 30

e. There is not enough information to be able to tell.

10. Minnie has an income of $300 in period 1 and will have an income of $625 in period 2. Her utility function isU(c₁,c₂) =c^0.80₁c^0.20₂, wherec₁ is her consumption in period 1 andc₂ is her consumption in period 2. The interest rate is 0.25. If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,250 and her income in period 1 would remain $300, then her consumption in period 1 would

a. double.

b. increase by $400.

c. increase by $150.

d. stay constant.

e. increase by $120.

11. Mr. O. B. Kandle has a utility functionc₁c₂, wherec₁ is his consumption in period 1 andc₂ is his consumption in period 2. He will have no income in period 2. If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 17%,

a. his savings would not change but his consumption in period 2 would increase by $2,450.

b. his consumption in both periods would decrease.

c. his consumption in both periods would increase.

d. his savings would increase by 7% and his consumption in period 2 would also increase.

e. his consumption in period 1 would decrease by 17% and his consumption in period 2 would also decrease.

12. Ella's utility function is min{5x,y}. If the price of x is $10 and the price of y is $15, how much money would she need to be able to purchase a bundle that she likes as well as the bundle (x,y) = (10, 25)?

a. $209

b. $440

c. $425

d. $475

e. $85

13. Reginald is fond of cigars. His utility function isU(x,c) =x + 10c .5c², wherec is the number of cigars he smokes per week and x is the money that he spends on the consumption of other goods. Reginald has $200 a week to spend. Cigars used to cost him $1 each, but their price went up to $2 each. This price increase was as bad for him as losing income of

a. $5.

b. $7.25.

c. $9.

d. $8.

e. $8.50.

14. Yoram's utility function isU(x,y) = 2x + 5y. The price of x is $4 and the price of y is $15. Yoram has $150 a week to spend onx andy. Yoram is offered a chance to join a club of y consumers. If he joins, he can gety at a price of $10. What is the most that Yoram would be willing to pay to join the club?

a. Nothing

b. $30 a week

c. $50 a week

d. $75 a week

e. None of the above.

15. Kristina consumes only goodsX andY. Her income is $600 and her utility function isU(x,y) = max{x,y}, wherex is the number of units ofX she consumes and y is the number of units ofY she consumes. The price of goodY is 1. The price of goodX used to be 1/2 but is now 2. The equivalent variation of this price change for Kristina is

a. $300.

b. $600.

c. $150.

d. $800.

e. None of the above.

16. At the initial prices, Teodoro is a net seller of apples and a net buyer of bananas. If the price of apples decreases and the price of bananas does not change,

a. the compensating variation must be negative and the equivalent variation positive.

b. the compensating variation must be positive and the equivalent variation negative.

c. both the compensating variation and the equivalent variation must be positive.

d. both the compensating variation and the equivalent variation must be negative.

e. the compensating variation must be negative but the equivalent variation could be of either sign.

17. Quasimodo from your workbook has the utility functionU(x, m) = 100x x²/2 +m, wherex is his consumption of earplugs and m is money left over to spend on other stuff. If he has $10,000 to spend on earplugs and other stuff and if the price of earplugs rises from $50 to $75, then his net consumer's surplus

a. falls by 937.50.

b. increases by 468.75.

c. falls by 2,937.50.

d. falls by 625.

e. increases by 1,875.

18. Bernice's preferences can be represented by the utility function,U(x,y) = min{x,y}. She faces prices ($2, $1), and her income is $12. If prices change to ($3, $1), the compensating variation

a. equals the equivalent variation.

b. is $2 greater than the equivalent variation.

c. is $2 smaller than the equivalent variation.

d. is $1 greater than the equivalent variation.

e. There is not enough information to determine which variation is larger.

19. Sam's utility function isU(x,y) = 2x +y, wherex is the number ofx's he consumes per week and y is the number ofy's he consumes per week. Sam has $200 a week to spend. The price ofx is $4. Sam currently doesn't consume anyy. Sam has received an invitation to join a club devoted to the consumption ofy. If he joins the club, Sam can get a discount on the purchase of y. If he belonged to the club, he could buyy for $1 a unit. How much is the most Sam would be willing to pay to join this club?

a. Nothing

b. $100 a week

c. $50 a week

d. $40 a week

e. None of the above.

20. . Ella's utility function is min{5x,y}. If the price of x is $10 and the price of y is $15, how much money would she need to be able to purchase a bundle that she likes as well as the bundle (x,y) = (10, 25)?

a. $209

b. $440

c. $425

d. $475

e. $85