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PRACTICE QUESTIONS 1. Your budget line equation for good 1 and good 2 is given by 1031 + 432 = m. In order to get 1 more unit of good 1, how many units of good 2 would you have to give up? a) 0.4 b) 4 c) 2.5 d) 1 2. Suppose that bundles (3,9) and (1,10) lie on your budget line. If you spent your entire income on good 1, how many units of good 1 could you buy? a) 21 b) 16 c) 12 d) 1.3 3. Charlie's utilityr function is given by u(1'1,:rg) 2 32. Which of the following is not true about Charlie's preferences? 3.) Charlie's preferences are monotone. b) Charlie likes the bundle (10,1) more than (1,20). c) Charlie likes the bundle (2,10) more than (5,2). :1) Charlie's preferences are convex. 23. Suppose then: are only two cuuswnels. Consumer 1's demand function is :t(p} : 14 p and eonSUIELeI 2's demand function is 1'03) 2 10 10. What is the aggregate consumer surplus at price p = 3? (a) 23 (b) 13 (c) 20 (d) 22 111 P1 Jr\". [P the price of good 1 24. Suppose the demand for good 1 is given by 121(1)], 11mm) : increases by 1%., then the demand for good 1 will (a) decrease by more than 1%. (b) decrease by less than 1%. (c) decrease by exactly 1%. (d) increase. 25. Suppose the demand for good 1 is given by $1031., 302,131.) 1%., then the demand for good 1 will (a) increase by more than 1%. (b) increase by less than 1%. (c) increase by exactly 1%. (d) decrease. 4. Nanny is indifferent between the bundle (9,3) and (3,9). If Nancy's preferences are complete, transitive, strictly monotone and strictly concave, which of the following must be true about Nancy's preferences? a) Nancy prefers (3,9) over (7,5). b) Nancy prefers (7,7) over (3,9). c) Nancy prefers (10,4) over (3,10). d) Nancy is indifferent between (10,3) and {3,10). 5. Doreen has preferences represented by the utility function H(I1,$2) = 109:1 + 532. She consumes 5 units of good 1 and 2 units of good 2. If her consumption of good 1 is lowered to 1I how man},r units of good 2 must she have in order to be exactly as well off as before? a) 8 b) 10 c) 12 d) 14 6. Janet consumes good 1 and good 2 together in fixed proportions. She always consumes 2 units of good 1 for every unit good 2. One utility function that describes her preferences is a) u(T1, X2) = 2142. b) u(x1, 12) = min {2x1, #2}. c) u(1, 12) = 2x1 + 12. d) u(x1, 12) = min {x1, 2x2}. 7. Charlie has the utility function u(1, 12) = $142. His Marginal Rate of Substitution at the consumption bundle (20,4) is given by a) -5 b) -0.2 c) -4 d) 1 8. Suppose a professor takes an average of the two exams a student takes to calculate the student's grade. Which of the following must be true about the student's preferences? a) The student's preferences are strictly convex. b) The student's preferences are strictly concave. c) The student has linear indifference curves. d) The student strictly prefers to divide her time equally between exams over spending all her time on only one exam.9. Hans has $30 which he decides to spend on good 1 and good 2. The price of good 1 is $20 per unit and the price of good 2 is $10 per unit. He has the utility function n(:sl,I-2} : 51:1 +232. Hans will choose to buy a) only good 1. b) only good 2. c) equal amounts of good 1 and good 2. d) Hans is indifferent between all the bundles on his budget line. 10.. Kelly has $40 which she decides to spend on good 1 and good 2. The price of good 1 is $20 per unit and the price of good 2 is $10 per unit. She has the utility function 15(11, 1'2) = 6:? +31%. Kelly will choose to buy a.) only good 1. b) only good 2. c) equal amounts of good 1 and good 2. d) Kelly is indi'erent between all the bundles on her budget line. 11. 12. ISObel consumes positive quantities of both apples and oranges. The price of an apple is 1 dollar per unit and the price of an orange is 2 dollars per unit. Her marginal utility of an apple is 10 and her marginal utility of an orange is 5. Which of the following statements must be true about Isoblel? a) Without changing her total expenditures, she could increase her utility by consuming more apples and fewer oranges. b) Without changing her total expenditures, she could increase her utility by consuming more oranges and fewer apples. c) Without changing her total expenditures, she could not increase her utility. d) We can't tell whether any of the other statements are true or false without knowing the quantities she consumes. Which of the following could possibly change a rational consumer's demand? a) Changing the utility function by performing a monotonic transformation. b) Multiplying all prices and income by the same constant. c) Adding the same constant to all prices and income. d) More than one of the above. 13. 14. 15. Katie's utility function is nl'Ij, IQ) = $1 + Elntrg}. Given her current income and the current relative prices, she consumes 10 units of $1 and 15 units of :52. If her income doubles, While prices stay constant, how many units of 1:2 will she consume after the change in income? a) 10 b) 15 c) 20 d) 30 Natalie's demand function for good 1 is given by 31(p1,p2,m) = 55%. If the price of good 2 goes up, how will this affect the demand curve for good 1'? a) The demand curve shifts to the right. b) The demand curve shifts to the left. c) This doesn't affect the demand curve. d) We need to know the demand function for good 2 to answer this question. Suppose Callie has strictly convex and monotonic preferences and she optimally chooses to consume zero units of good 1 and 10 units of good 2. Which of the following CANNOT be true based on this information? a) Callie's indifference curve is tangent to the budget line at the bundle (0,10). b) Callie's indifference curve is atter than the budget line at the bundle (0,10). c) The bundle (0,10) is on Callie's budget line. d) Callie's indifference curve is steeper than the budget line at the bundle (0,10). 16. Alfredo lives on apples and bananas only. His utility function is u(a.,b) = min{a,2b}. He maximizes his utility subject to his budget constraint and consumes the bundle [(1,6) = [4, 2). Suppose the price of bananas goes up. How will this affect the demand for apples? a) Alfredo will consume more than 4 apples. b) Alfredo will consume fewer than 4 apples. c) Alfredo will consume exactly 4 apples. d) Alfredo might consume more or fewer than 4 apples depending on how much the price of bananas went up. 17. At prices (4, 2), Ivan buys the bundle (8,29). At prices (3,302}, he buys the bundle (10,17). If Ivan's choices satisf)r the Weak Axiom of Revealed Preferences, which of the following can be the value of 302'? (a) 4 (b) 5 (c) '5 (d) All of the above. 13. If Sun chooses the bundle {5,5} when prices are (5,2) and the bundle (10,0) when prices are (2:5)? (a) (6,6) is revealed preferred to (10,0) but there is no evidence that she violates WARP. (b) neither bundle is revealed preferred to the other. (c) Sun violates WARP. (d) (10,0) is revealed preferred to (5,5) and there is no evidence that she violates WARP. 19. Ben consumes two goods and his utility function is a[.r1,:rg) = Ilzg. The price of good 2 does not change and his income does not change, but the price of good 1 decreases. Which of the following must be true? (a) The income effect is zero, since his income remained constant. (b) The substitution eect on the demand for good 2 is zero, since the price of good 2 did not change. (c) The substitution effect reduces the demand for good 2, and since the income effect is zero, the demand for good 2 falls. (d) The substitution effect of the price change reduces the demand for good 2 and increases the demand for good 1. 2U. Waltls utility function is u[:r1,.r2) = 5:1 + 9:2. Good 1 and good 2 originally cost $10 and $9 respectively. Walth income is $720. One dag.r the price of good 1 drops to $3. Which of the following is true? (a) The income effect increases the demand for good 2 by 90. (b) The substitution eect increases the the demand for good 2 by 30. (c) The substitution eect increases the demand for good 1 by 90. (d) The income effect increases the demand for good 1 by 3-0. 21. 1f the demand for computers is increasing in income, which of the following cannot be true about computers? (a) Computers are a normal good. (b) If the price of computers goes up, demand for computers might go up. (c) The income effect of a price increase is always negative for computers. (d) If the price of computers goes down, the substitution effect increases the demand for computers. 22. Suppose there are only two consumers. Consumer 1's demand flmction is :r(p) : 14 p and consumer 2's demand function is $(p) : 10 p. What is the price at which the market demand is unit elastic? (a) 5 (b) 7 (c) 3 (d) 12 Answer Key 1. c 2. a 3. c 4. a 5. b 6. d 7. b 8. c 9. a 10. b 11. a 12. c 13. b 14. a 15. d