16. Assume that the consumer has an income of $170. If the price of a good Y is $10 and the price of good X is $10, what would the optimizing consumer choose to purchase? (1) 5 units of good Y, 5 units of good X (2) 10 units of good Y, 7 units of good X (3) 20 units of good Y, 10 units of good X (4) 8 units of good Y, 11 units of good X 17. Given that Francis consumes normal goods, what will happen to Francis' savings and consumption if interest rates increase? (1) Savings will always increase, while consumption will always decrease. (2) Savings will decrease if the substitution effect is greater than income effect. (3) Consumption will decrease if the income effect is greater than substitution effect. (4) Consumption will increase if the income effect is greater than substitution effect. 18. When a change in price results in a consumer moving to a new optimum at which the marginal rate of substitution has changed, the consumer experiences a(n): (1) budget effect. (2) substitution effect. (3) preference effect. (4) income effect. 19. What is the best way to describe two goods that have a slightly bowed inward indifference curve? (1) Perfect substitutes (2) Perfect complements (3) Very close substitutes (4) Very close complements 20. Goods X and Y are perfect complements. If the price of good Y falls, what will be the consequences of the substitution effect? (1) It will not affect the amount of goods X and Y that consumers buy. (2) It will cause consumers to buy more of good X and less of good Y. (3) It will cause consumers to buy more of good Y and less of good X. (4) It will affect the amount of goods X and Y that consumers buy, but in an unpredictable way.11. A consumer can reach an optimum level of consumption of two goods by: (1) consuming at any point outside the lowest indifference curve. (2) consuming at the point where the budget constraint is tangent to the highest indifference curve. (3) consuming at the point where the marginal rate of substitution is below the relative price of the two goods. (4) consuming at the point where the marginal rate of substitution is greater than the relative price of the two goods. THE NEXT QUESTION IS BASED ON THE FOLLOWING GRAPH: Quantity 4 of Y 5 15 Quantity of X 12. If income is equal to $210, what is the price of good X? (1) $8 (2) $10 (3) $12 (4) $14 13. Chad's budget constraint curve has shifted outwards. What will he now buy? (1) More of normal goods and less of inferior goods (2) Less of normal goods and more of inferior goods (3) More of both normal goods and inferior goods (4) Less of both normal goods and inferior goods5. If the consumer is currently at point C in the figure, what effect is represented by a movement to point B as a result of an increase in the price of potato chips? (1) Substitution effect (2) Budget effect (3) Income effect (4) Price effect THE NEXT TWO (2) QUESTIONS ARE BASED ON THE FOLLOWING GRAPH: HA 2 1 0 2 Assume that line 1-1 depicts a consumer's budget line, giving choices of housing consump (H, measured in square feet) and expenditures on other goods (X). 6. What change would occur if the price of housing rises? (1) A pivot to 0-1 (2) A shift to 0-0 (3) A shift to 2-2 (4) A pivot to 1-23. Clemens is a starving student. To save money for tuition, books, and beer he chooses to eat only steak or macaroni and cheese. Clemens is a tutor and has an annual income of $7,000. This year, Clemens has received a scholarship for $3,000. Additionally, the price of macaroni and cheese has also decreased by $0.10 per box since last year, yet Clemens is buying less macaroni and cheese this year than he did during the previous year. For Clemens: (1) macaroni and cheese is a Giffen good. (2) steak is an inferior good. (3) macaroni and cheese is a normal good and the substitution effect is larger than the income effect. (4) macaroni and cheese is an inferior good and the income effect is larger than the substitution effect. 4. Which of the following characterizes the consumption bundle selected by an optimizing consumer? (1) The ratio of total utilities is equal to the relative price. (2) The ratio of income to price equals the marginal rate of substitution. (3) The marginal rate of substitution is equal to the relative price. (4) The marginal rate of substitution is equal to income. THE NEXT QUESTION IS BASED ON THE FOLLOWING GRAPH: Quantity A of Potato Chips B Quantity of Diet Coke\fConsider a twoperiod model of a small open economy with a single good each period and no investment. Let preferences of the representative household be described by the utility function U{C1, C2} = p C1 + [5 p C2 The parameter [3 is known as the subjective discount factor. It measures the consumer's degree of impatience in the sense that the smaller is B, the higher is the weight the consumer assigns to preserrt consumption relative to future consumption. Assume that B = U11. The representative household has initial net foreign wealth of {1 + rlt I] = 1, with r = [1.1, and is endowed with Ell = 5 units of goods in period 1 and 02 = ID units in period 2. The world interest rate paid on assets held from period lto period 2, r * , equals 16% {i.e., r * = [1.1] and there is free international capital mobility. 1. Calculate the equilibrium levels of consumption in period 1, C1, consumption in period 2, C2, the trade balance in period 1, T El, and the current accourrt balance in period 1, CA1. 2. Suppose now that the government imposes capital corrtrols that require that the country's net foreign asset position atthe end of period 1 be nonnegative {3* 1 a D}. Compute the equilibrium value of the domestic interest rate, r1, consumption in periods 1 and 2, and the trade and currerrt account balances in period 1. 3. Evaluate the effect of capital corrtrols on welfare. Specically, nd the level of utility under capital controls and compare it to the level of utility obtained under free capital mobility. 4. Forthis question and the next, suppose that the country experiences a temporary increase in the endowment of period 1 to El = '3, with period 2 endowment unchanged. Calculate the effect of this output shod: on C1, C2, T Bl, CA1, and r1 in the case that capital is freely mobile across courrtries