QUESTION 1

John's utility function over Lindt and Cadbury's chocolate is as follows: U(L,C) = L^(3/4)*C^(1/4). When the price of Lindt chocolate increases, John's optimal consumption of Cadbury'schocolate will...

(a) increase

(b) decrease

(c) stay the same

QUESTION 2

A government is choosing between a lump sum subsidy versus the same amount of money as a food subsidy (i.e. food becomes cheaper to the same value of savings as the lump sum amount). Which would give citizens a higher utility?

(a) they give the same utility because it's the same amount of money

(b) food subsidy

(c) lump-sum subsidy

QUESTION 3

There are some concerns about the distorting effects of specific taxes (as opposed to lump-sum taxes). Which effect explains this concern?

(a) income effect

(b) substitution effect

QUESTION 4

Consider goods a and b.The price of a is 5; and the price of b is 10.Income is 150.And utility is given byU(a,b)=a^(1/3)*b^(2/3).What is Marshallian demand for a?

(a) 10

(b) 15

(c) 50

(d) 20

QUESTION 5

Consider goods a and b.The price of a is5;and the price of b is10.Income is150.And utility is given byU(a,b)=a^(1/3)*b^(2/3).Whatis the indirect utility?

(a) 5

(b) 50

(c) 20

(d) 10

QUESTION 6

Consider goods a and b.The price of a is5;and the price of b is10.Income is150.And utility is given byU(a,b)=a^(1/3)*b^(2/3).Whatis the compensating variation (extra income to keep the same level of utility as before) needed if the price of a increases to 10?

(a) -150

(b) -39

(c) -89

(d) -65

QUESTION 7

If utility is given byU(a,b)=a^(1/3)*b^(2/3).Ifthe price of b increases, what happens to thecompensateddemand for a?

(a) decreases

(b) stays the same

(c) increases