1. Which of the following is NOT an assumption about how the preference relations work? a) completeness b) reflexivity c) transitivity d) monotonicity 2. If two indifference curves cross itself this contradicts the assumption of a) completeness. b) reflexivity. c) transitivity. d) monotonicity. 3. Indifference curves are convex to the origin because of: a) transitivity of consumer preferences. b) the assumption of a diminishing marginal rate of substitution. c) the assumption that more is preferred to less. d) the assumption of completeness.

4. Which of the following statements best represents Bob's preference for hamburgers and soft drinks illustrated in the figure above? a) Bob dislikes both hamburgers and soft drinks. b) Bob loves hamburgers and dislikes soft drinks. c) Bob likes hamburgers, but neither likes nor dislikes soft drinks. d) Bob loves both goods and consumes them in fixed proportions.

Hamburgers

Soft Drinks

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5. In the figure above anchovies are a a) good. b) bad. c) neutral good. d) bliss good.

6. In the figure above, Graph A, B and C illustrate preferences of a(an) a) perfect substitutes, perfect complements, and a bad respectively. b) perfect complements, perfect substitutes and a bad respectively. c) perfect complements, a bad and perfect substitutes respectively. d) bad , perfect complements, and a perfect substitutes respectively. 7. Where two (2) goods are perfect substitutes, the indifference curves are a) positively sloped lines. b) vertical lines. c) straight lines with a slope of -1. d) L-shaped. 8. Which of the following utility functions is an example of Cobb-Douglas preferences? a) U(x,y)xy b) U(x,y)min{2x,y} c) U(x,y)3x5y d) U(x,y)2x 2 4y

9. Preferences for perfect substitutes can be represented by a utility function of the form

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a) b) . c) . d) None of the above. 10. The slope of an indifference curve reveals: a) that preferences are complete. b) the marginal rate of substitution of one good for another good. c) the ratio of market prices. d) that preferences are transitive. 11. Peter has the utility function U (M, N) = M 0.5 N 0.25 . When Peter consumes M=2 and N=6 he has a marginal rate of substitution (MRS MN ) of a) -6 b) -1/12 c) -12 d) -1/6 12. If utility is given by (,)Uxy xy

, then the person's MRS XY at the point x = 5, y = 2 is

given by a) 0.4. b) 1.0. c) 2.5. d) 5.0.

13. What happens to marginal rates of substitution (MRS) when a positive monotonic transformation is applied to a Cobb-Douglas utility function? a) The MRS is unchanged. b) The MRS is increased. c) The MRS is decreased. d) The MRS is indeterminate. 14. Which of the following is not a monotonic transformation of U(x,y) = x + y? a) x + y - 3 b) x + y + 3 c) 3(x + y) d) none of the above

4 15. What are the basic assumptions about individual preferences? Explain the significance of each. 16. Assume that preferences satisfy the usual axioms. Also assume they satisfy monotonicity. Show why two indifference curves cannot cross itself and explain your answer. 17. Draw indifference curves that represent the following individuals' preferences for hamburgers and soft drinks. Indicate the direction in which the individuals' satisfaction (or utility) is increasing. Note. use soft drink for the x axis. Draw indifference curves that represent the following individuals' preferences for hamburgers and soft drinks. Indicate the direction in which the individuals' satisfaction (or utility) is increasing. a) Joe has convex preferences and dislikes both hamburgers and soft drinks. b) Jane loves hamburgers and dislikes soft drinks. If she is served a soft drink, she will pour it down the drain rather than drink it. c) Bob loves hamburgers and dislikes soft drinks. If he is served a soft drink, he will drink it to be polite. d) Molly loves hamburgers and soft drinks, but insists on consuming exactly one soft drink for every two hamburgers that she eats. e) Bill likes hamburgers, but neither likes nor dislikes soft drinks. f) Mary always gets twice as much satisfaction from an extra hamburger as she does from an extra soft drink. 18. Julian has the following utility function: U = X 0.5 Y 0.5 where X is the number of CDs and Y is movies per month. a) Determine Julian's MRS x.y when X=4 and Y=6 b) Explain whether U = XY is a monotonic transformation of the utility function of U = X 0.5 Y 0.5

19. Suppose Roy utility function for food (F) and clothing (C) is U(FC) =FC a) Given that Roy derives utility U=8 graph his indifference curve corresponding with F= {1,2,4} b) What is the MRS of clothing for food for the basket (1,8) to (2,4) c) Suppose the utility derived from food and clothing increased by the factor 2 (monotonic transformation). Draw Roy's new Indifference curve. d) Show that the MRS remains constant as he moves from U 1 to U 2 e) State the relationship between the bundle (2,4) (1,8) and (2,8)

20. Charlie has no health concerns and loves French fries. He wants to consume as many fries as possible. At Charlie's favourite hang-out fries come in two sizes: small and large. The small size (x S ) has 1 oz of fries, and the large size (x L ) has 5 oz of fries. a) Draw his indifference curve through the bundle (x S , x L ) = (10,0) and of his indifference curve through the bundle (x S , x L ) = (10,2)

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b) Determine his MRS S,L at the bundle (10,2) c) Explain in plain English what the MRSS,L at (10, 2) measures d) Does the indifference curve exhibit diminishing MRS? Explain. e) Give an example of a utility function that captures his preferences