1.

If the marginal utility of good 1 is twice marginal utility of good 2 , then the Law of

Diminishing Marginal Utility implies that the consumer will maximize his total utility only

if

a) The price of good 1 is twice the price of good 2

b) The price of good 1 is greater than the price of good 2

c) Price of good 1 is half the price of good 2

d) None of the above

2)

Suppose good 1 is measured along the horizontal axis and good 2 is measured along the

vertical axis. Then a vertical indifference curve implies that the consumer

a) Is saturated with good 1

b) Is saturated with good 2

c) Dislikes good 1

d) Is saturated with both good 1 and 2

3

Which of the following assumptions is satisfied by the lexicographic ordering

a) Completeness

b) Reflexivity

c) Continuity

d) Transitivity

4)

If in a model with only two goods , the marginal rate of substitution of good 2 for good

1 is a constant greater than the price ratio p₁/p₂

, then the consumer will

a) Not buy good 1

b) Not buy good 2

c) Be indfferent among all combinations of goods 1 and 2 permitted by his budget line

d) Adjust his preference , for if he is rational , the marginal rate of substitution will not be a constant.

5

In which of the following cases will the budget line move out from the origin without

changing its slope

a) The price of good 1 increases by 5% while the price of good 2 decreases by 5%

b) The prices of goods 1 and 2 increase by 5%

c) The prices of goods 1 and 2 decrease by 5% while money income decreases by 2.5%

d) The prices of goods 1 and 2 increase by 10% while money income increases by 5%

6)

If the marginal rate if substitution of good 2 for good 1 exceeds the price ratio p₁/p₂ , it is possible for the individual to gain by giving up

a) Good 1 in exchange of good 2

b) Good 2 in exchange of good 1

c) Either good 1 or good 2 can be exchanged for the other

d) Any one of the above is possible.

7

In a two-good model, if the price of good 1 falls and the substitution effect on the quantity

of good 1 consumed is greater than the income effect on the quantity of good 1 consumed in absolute terms, then we can be sure that

a) Good 1 is normal

b) Good 1 is inferior

c) Good 1 is not Giffen

d) Good 2 is normal

8

Consider the linear demand curve q = 10 - 2p. If the price is 2 the consumer surplus is

a) 7

b) 8

c) 9

d) 6

9)In deriving the Slutsky substitution effect, The purchasing power of income is kept con-

stant when the price of a commodity falls by

a) Keeping the consumer on the same indifference curve

b) Relegating the consumer to a lower indifference curve

c) Enabling the consumer to purchase the same bundle of goods as before the price change

d) Enabling the consumer to buy more of both commodities than before the price change

10)

Which of the following cases indicates a Giffen good

a) Income elasticity of demand and price elasticity of demand are both positive

b) Income elasticity of demand and price elasticity of demand are both negative

c) Income elasticity of demand is positive but the price elasticity of demand is negative

d) Income elasticity of demand is negative but price elasticity of demand is positive

11)

If L is the only variable factor used in production of a good and if the marginal product of L is 4 and price of L is 5, then the marginal cost of producing the good is

a) 4/5

b) 5/4

c) 1

d) None of the above

12)

If a firm has the long run production function q = K^0.3L^0.7 and input prices are constant, then the long run marginal cost

a) Equals long run average cost

b) Is less than long run average cost

c) Is greater than long run average cost

d) Any of the above is possible

13

A perfectly competitive rm might be maximizing prots in the short run when

a) Average variable cost is falling

b) Average cost is falling

c) Marginal cost is falling

d) Average product of the variable factor is rising