Exam12015 microfinal 2 PDF

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Intermediate Microeconomics 101 First Midterm Examination There are …ve questions (20% each question). have 80 minutes.

Please answer all questions. You

Good luck!

1. Suppose an individual can purchase two goods - good 1 and good 2. The individual can spend Y. Given the situations speci…ed below in each case draw the relevant budget set and explain a.The price of good 1 is p1 but there is a is p2 , with

15%

20%

discount on it, and the price of good

2

discount.

b. The price of good 1 is always p1 , and the price of good 2 is p2 : If you buy more than

2

units good 1 (and you can a¤ord to do this), you obtain a coupon with

value to buy

$z

either of the goods.

2. Here is a table of prices and the demands of a consumer Tom.

His behavior was

observed in 4 di¤erent price-income situations.

Situation

p1

p2

X1

X2

A

1

1

5

35

B

3

1

5

15

C

1

2

10

10

D

1

1

10

15

a. What is the Weak Axiom of Revealed Preference? b. Is Tom’s behavior consistent with the Weak Axiom of Revealed Preference? c. Are there points that you are certain are worse than the bundle D? Explain. d. Suppose Tom’s preference is convex and monotonic and he obeys the strong axiom of revealed preference.

Write down the points that you are certain are at least as

good as bundle D. Explain.

1

3. There are 2 consumption goods: health insurance and food. Health insurance costs $1per unit (you can buy partial insurance) and food costs $0.80 per unit. Your

p

utility function is u(h; f ) = 20

h

+f

a) Your monthly allowance is $100. What is your optimal consumption bundle? What is your resulting utility level? b) Now the insurance company increases the price of insurance to $2 per unit. What would be your new consumption bundle and new utility level in this case? c) After this price change, your father observes that you are not as happy as before, and wants to bring back you to your original utility level. To this respect he increases your allowance. How much he should increase your allowance to make sure that you get your original utility level? (Note that you will have a utility maximization problem here with new income level and prices as in part b.) 4. For each of the following, decide whether the statement is True/False, and brie‡y explain why. Marks are awarded for your explanation. a) In a two good economy, for an agent whose preferences are represented by the utility function u(x1 ; x2 ) = min(x1 ; x2 ) + max(x1 ; x2 ) the two goods are perfect substitutes of each other. b) In an economy where all the goods are positively valued (i.e.,they are not considered as bads); if price of a good decreases, then the consumer becomes strictly better o¤. c) There are two goods: good X and good Y with prices are The utility functions of Ali and Bob are

(

ua x; y

)=

x

0:4 0:6 y

px

, and

and

(

py

uB x; y

respectively.

)=

3 2

x y

At

their optimal consumption bundle their Marginal Rate of Substitutions would be the same. d) If two goods are perfect complements for you then you would be indi¤erent between the bundles (1; 1) and (2; 1).

2

5. Suppose a consumer has a demand function for black puddings of the form

q

1

= 5+

m 4p

1

His income is $100 and the price of black pudding is $5 per unit. Suppose the price drops to $3 per unit. (a) What is the new level of income necessary to keep purchasing power constant? That is, what is his implied income so he can still just purchase what he did when the price was $5 (b) What is the consumers demand demand for black puddings at $3 per unit and the income level obtained in your answer to (a)? (c) Explain what is the Slutsky substitution e¤ect?

3...