QUESTION 1

1.Consider the graph which is attached to the four answers.It shows the preferences and budget constraint of Sheila, who consumes fine

meals and Ranger games.

Suppose that this person moves from M to V.It follows that:

a.

her utility and her total expenditure on goods will be unchanged

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

b.

her utility will rise but her total expenditure on goods will be unchanged

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

c.

her utility and total expenditure on goods will both rise

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

d.

her utility will be unchanged but her total expenditure on goods will rise

Spring 2021 Economics 3212 1st exam graph on consumer theory .docx

QUESTION 2

1. Consider the following version of the earned income tax credit (EITC).

All persons who earn less than $20,000 are given a wage subsidy of $0.50 for each dollar worked.The maximum benefit is therefore $10,000.

All persons who earn between $20,000 and $30,000 are paid the maximum benefit of $10,000.This is the income disregard region.

The phaseout occurs in the income range from $30,000 to $50,000.In this range the maximum benefit $10,000 is cut by $0.50 for each dollar earned.For example, a person who earns $30,001 will get paid $10,000 -$0.50 = $9,999.50.At an income of $50,000 the program has been totally phased out.

Now focus on a person initially working and earning $15,000 before the plan is introduced.

Consider the net effect of this program (i.e. we are talking in this question about BOTH the income and substitution effects) for a person earning this amount. The program will:

a.

have no effect on time spent working

b.

cause time spent working to rise

c.

cause time spent working to fall

d.

may cause time spent working to rise, fall, or remain the same

QUESTION 3

1. The price of shrimp is $10/lb and the price of swordfish is $20/lb.Let a 'util' be a unit of utility.Assume that the marginal utility of

swordfish is 30 utils.Suppose that John is maximizing his utility and is consuming only swordfish.It follows that the marginal utility of

shrimp is:

a.

between 15 and 30 utils

b.

zero

c.

less than or equal to 15 utils

d.

exactly 30 utils

QUESTION 4

1. Consider the following hypothetical poverty program.Any person who earns less than $15,000 is given a subsidy of $0.50 for each

dollar worked.The maximum benefit is equal to $7500 and it is reached if a person earns exactly $15,000.

The phaseout begins immediately afterwards.For each dollar earned beyond $15,000, the benefit is cut by $0.50.The net benefit

falls to zero when a person earns $30,000.

The program is shown in the graph that is attached to each answer. The original budget line is AB and it is presumed that there is no

unearned income.The plan budget line isAGVB.The slope of AG is equal to 1.5w, where w denotes the wage.

Point G corresponds to the situation where the person is earning exactly $15,000 and is

getting the maximum benefit of $7500.It follows that the vertical distance from the budget line AB to G is equal to $7500.

Point V corresponds to the situation where the person is earning exactly $30,000.At that point the original and plan budget lines coincide because the net benefit is equal to zero.

The line GV is the phase out range between $15,000 and $30,000.In this range the net benefit is equal to 0.5w.

Consider a person who is initially earning $10,000 before the plan is introduced.In this question the focus is on thenetimpact of the substitution and/or income effects.When the plan is introduced, his:

a.

time spent working will unambiguously fall

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

b.

time spent working will be unchanged

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

c.

time spent working will unambiguously rise

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

d.

time spent working may rise, fall, or remain the same

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

QUESTION 5

1. Consider the model presented in class where a person consumes movies and Ranger games. Suppose that the price of movies rises and

this causes the number of movies consumed to rise.It follows that:

a.

a movie is a normal good

b.

a Ranger game is an inferior good

c.

a Ranger game is a Giffen good

d.

a movie is a Giffen good

QUESTION 6

1. Consider the following version of the earned income tax credit (EITC).

All persons who earn less than $20,000 are given a wage subsidy of $0.50 for each dollar worked.The maximum benefit is therefore $10,000.

All persons who earn between $20,000 and $30,000 are paid the maximum benefit of $10,000.This is the income disregard region.

The phaseout occurs in the income range from $30,000 to $50,000.In this range the maximum benefit $10,000 is cut by $0.50 for each dollar earned.For example, a person who earns $30,001 will get paid $10,000 -$0.50 = $9,999.50.At an income of $50,000 the program has been totally phased out.

Now focus on a person initially working and earning $15,000 before the plan is introduced.

Consider the impact of the income effect (note that in this question we are not talking about the substitution effect!).Which of the following is true?

a.

the income effect may raise or lower time spent working

b.

the income effect will raise time working

c.

the income effect will lower time spent working

d.

there is no income effect in this income range

QUESTION 7

1. Consider the labor supply model. Assume that consumption and leisure are both normal. Suppose that unearned income rises.This

implies that:

a.

consumption and leisure will both fall

b.

consumption and leisure will both rise

c.

consumption will fall and leisure will rise

d.

consumption will rise and leisure will fall

QUESTION 8

1. Consider the following hypothetical poverty program.Any person who earns less than $15,000 is given a subsidy of $0.50 for each dollar worked.The maximum benefit is equal to $7500 and it is reached if a person earns exactly $15,000.

The phaseout begins immediately afterwards.For each dollar earned beyond $15,000, the benefit is cut by $0.50.The net benefit falls to zero when a person earns $30,000.

The program is shown in the graph that is attached to each answer. The original budget line is AB and it is presumed that there is no unearned income.The plan budget line isAGVB.The slope of AG is equal to 1.5w, where w denotes the wage.

Point G corresponds to the situation where the person is earning exactly $15,000 and is

getting the maximum benefit of $7500.It follows that the vertical distance from the budget line AB to G is equal to $7500.

Point V corresponds to the situation where the person is earning exactly $30,000.At that point the original and plan budget lines coincide because the net benefit is equal to zero.

The line GV is the phase out range between $15,000 and $30,000.In this range the net benefit is equal to 0.5w.

Consider a person who is initially earning $20,000 before the plan is introduced. When the plan is introduced, thesubstitutioneffect (note that we are only dealing with the substitution effect and not the income effect) will cause:

a.

time spent working will be unchanged

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

b.

time spent working will unambiguously fall

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

c.

time spent working may rise, fall, or remain the same

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

d.

time spent working will unambiguously rise

Spring 2021 Economics 3212 1st exam hypothetical labor supply program graph.docx

QUESTION 9

1. Jane initially is paid $17/hour for all hours worked.She chooses to work exactly 35 hours.Now her boss offers her a new pay scheme.

She will continue to be paid $17/hour for the first 30 hours. She will be paid $20/hour for each additional hour.The new system where

overtime pay is provided:

a.

will cause her to work more

b.

may cause time spent working to rise, fall, or remain the same

c.

will have no effect on time spent working

d.

will cause her to work less

QUESTION 10

1. Consider the model presented in class where a person buys movies and Ranger games.Assume that both goods are normal. Suppose that the price of Ranger games falls.Theincomeeffect (note that I am not talking about the substitution effect here) causes:

a.

the number of Ranger games purchased to fall and the number of movies purchased to rise

b.

the number of Ranger games and movies purchased to both rise

c.

the number of Ranger games purchased to fall and the number of movies purchased to fall

d.

the number of Ranger games purchased to rise and the number of movies purchased to fall