EC 11 Microeconomics, Midterm #1 Version A
Name:_________________________ Student ID #: ___________________
The fo o!in" e#am consists of t!o $arts% &art I is a mu ti$ e choice section !ith 1' (uestions !orth ) $oints each% &art II is a short ans!er section !ith * (uestions +each !ith mu ti$ e $arts, !orth *- $oints each% & ease ta.e /our time and read each question carefully% A so ma.e sure that /our ans!er is c ear / [Link]% 0ou ha1e 2' minutes to com$ ete this e#am and the use of a$$ro1ed ca cu ators is $ermitted% 3ood 4uc.5
&art I: Mu ti$ e Choice 6uestions
1, 7hich of the fo o!in" is not a common assum$tion economists ma.e a8out consumers9 a% Consumers rea i:e a diminishin" mar"ina rate of su8stitution 8et!een t!o "oods consumed% 8% Consumer $references are com$ ete and continuous% c% Consumer $references are con1e#% d% Consumers are not constrained 8/ their 8ud"ets% e% Consumers are uti it/ ma#imi:ers% *, Consider the fo o!in" * statements and choose the correct res$onse to these statements: I% ;or a consumer in a t!o<"ood !or d, a corner so ution can on / 8e o$tima !hen one "ood is an economic 8ad% II% ;or $erfect com$ ements, the mar"ina rate of su8stitution !i ne1er e(ua the s o$e of the 8ud"et ine so on" as $rices are $ositi1e% a% 8% c% d% e% I and II are 8oth correct% I and II are 8oth incorrect% I is correct and II is incorrect I is incorrect and II is correct There is not enou"h information in these statement to =ud"e correctness
>, 7hich of the indifference ma$s 8e o! sho! a consumer !ith $references !hich are not con1e#9
a%
8%
c%
d%
e% none of the a8o1e
), Consider a t/$ica consumer !ho is consumin" 8und e B? !hich is com$rised of t!o "oods, X and Y% If at this 8und e M@SXY e#ceeds the ratio of &X to &Y, then !hich of the fo o!in" statements is true9 a% If $ossi8 e, this consumer !ou d 8e !i in" to trade a!a/ some of their consum$tion of Y for some additiona X% 8% This consumer !ou d 8e 8etter off if the/ consumed more Y% c% The mar"ina uti it/ of consumin" X is "reater than the mar"ina uti it/ of consumin" Y. d% +a, and +c, are true% e% +a,, +8, and +c, are true% ', Consider the three sets of $rices, income and consum$tion for the consumer sho!n 8e o!% 7hich 8und e $ro1ides the hi"hest e1e of uti it/ for this consumer9
Aund e Income &;ish A 1-1 A 1'* C *->
a% 8% c% d% e%
&Aarre s 1' '
;ish )**'
Aarre s B ** *'
Aund e A Aund e B Aund e C Aund es A and C "i1e the same +hi"hest, e1e of uti it/% This cannot 8e determined 8ecause this consumer is o81ious / not rationa %
B, 7hich of the fo o!in" statements is true re"ardin" an income<consum$tion cur1e9 a% 8% c% d% e% Cti it/ is he d constant from $oint to $oint a on" the cur1e% It can on / 8e $ositi1e / s o$ed% It is a so ca ed the En"e Cur1e% The s o$e indicates !hether "oods are su8stitutes or com$ ements% None of the a8o1e is true%
Consider a consumer !ith the fo o!in" $rice<consum$tion and income<consum$tion cur1es for 3ro" and S!i % Dne $icture sho!s the $rice of "ro" at EF, !here a consumer has EB--, E1,*-- and E1,G-- to s$end% The other $icture sho!s a consumer !ith EB-on /, !here the $rice of "ro" 1aries to 8e E>, EB and EF% The $rice of S!i does not 1ar/ and is the same in 8oth $ictures%
3ro" 3ro"
'G >1 1S!i
T!o sets of demand cur1es for this consumer are a so sho!n 8e o!%
*' 1G 1S!i &rice of 3ro" EF
&rice of 3ro" EF
1-
6uantit/ of 3ro"
1- M
6uantit/ of 3ro"
2, If J, H, M and N corres$ond to $oints on the "ra$hs of the $rice<consum$tion and income<consum$tion cur1es, !hich of the fo o!in" are i.e / 1a ues for J, H, M and N9 a% 8% c% d% e% M and N cou d 8e either 1G or *', and J and H cou d 8e either >1 or 'G% M and N cou d 8e either >1 or 'G, and J and H cou d 8e either 1G or *'% M H 1G, N H *', J H >1 and H H 'G% M H >1, N H 'G, J H 1G and H H *'% There is not enou"h information to ma.e this determination%
G, Cse the fo o!in" t!o statements to ans!er this (uestion: I% 7hen the $rice of a "ood chan"es, the corres$ondin" chan"e in consum$tion is due entire / to the su8stitution effect 8ecause that "ood has 8ecome chea$er or more e#$ensi1e re ati1e to other "oods% The income effect a !a/s !or.s in a $ositi1e direction, i%e% more income eads to "reater $urchasin" $o!er and thus "reater consum$tion of a "oods%
II%
a% 8% c% d% e%
I and II are true% I is true, and II is fa se I is fa se, and II is true I and II are fa se% There is not enou"h information to ma.e a determination%
A consumer s$ends a of their income on 7ine and [Link]% @ecent / ho!e1er the $rice of 7ine has risen from +&o d, to +&ne!,% As a resu t this consumer has shifted their consum$tion of these t!o "oods from Io d to Ine!% These consum$tion 8und es are sho!n 8e o!%
Wine
LIo dM S o$e H +&o d,K+&[Link], LIne!M S o$e H +&ne!,K+&[Link],
Crackers
F, ;or this consumerJs consum$tion of 7ine, the su8stitution effect causes consum$tion to _____________, the income effect causes consum$tion to _____________, and the resu t is aKan ____________ "ood !here o1era consum$tion _____________% a% 8% c% d% e% increase, decrease, inferior, decreases% decrease, decrease, inferior, increases% decrease, increase, 3iffen, increases% decrease, increase, inferior, decreases% increase, increase, 3iffen, increases%
1-, 7hich of the fo o!in" statements a8out $oint $rice e asticit/ is not true9 a% E asticit/ is defined as N& di1ided 8/ N6% 8% It is a unit<free measure of consumer sensiti1it/ to $rice% c% Consumer e#$enditures are oca / ma#imi:ed !here e asticit/ of demand H <1 or Oe asticit/ of demandO H 1, assumin" the [Link] c ears% d% Consumers !ith $erfect / ine astic demand are not sensiti1e to chan"es in $rice% e% A hori:onta demand cur1e is $erfect / e astic% 11, Consider a consumer !ith the uti it/ function: C+x, H n x %7hich of the fo o!in" is true a8out this consumer9 a% 8% c% d% e% The/ ha1e a diminishin" mar"ina uti it/ of consum$tion% The/ are ris. a1erse% The/ ha1e a conca1e uti it/ function% +a, and +8, are true% +a,, +8, and +c, are a true%
1*, Cse the fo o!in" t!o statements to ans!er this (uestion: I% 7here choosin" 8et!een t!o otteries !ith the same e#$ected outcome 8ut different 1aria8i it/, a ris. o1in" consumer !i $refer the more 1aria8 e otter/% 7here choosin" 8et!een t!o otteries !ith the same e#$ected outcome 8ut different 1aria8i it/, a ris. neutra consumer !i $refer the ess 1aria8 e otter/%
II%
a% 8% c% d% e%
I and II are true% I is true, and II is fa se I is fa se, and II is true I and II are fa se% There is not enou"h information to ma.e a determination%
;or 1> 1), consider a otter/ !ith > $ossi8 e outcomes, each occurrin" !ith some $ro8a8i it/ as sho!n 8e o!% &ossi8 e Dutcome Aest D.a/ 7orst Va ue of Dutcome E1---E*'-E1-&ro8a8i it/ of Dutcome -%-1 -%1 -%GF
1>, ;or a consumer !ith a uti it/ function of C+#, H #, !hat is the e#$ected 1a ue of this otter/9 a% 8% c% d% e% E1-E1)%FE),*-E)>F This cannot 8e determined !ithout 8ein" "i1en the standard de1iation%
1), ;or a consumer !ith a uti it/ function of C+#, H #, !hat is the e#$ected uti it/ of this otter/9 a% 8% c% d% e% 1*-%F' 1)%F>%GB This cannot 8e determined !ithout 8ein" "i1en the standard de1iation%
1', 7hich statement is not true re"ardin" indifference cur1es on a "ra$h of e#$ected return and ris.% a% The s o$e of the indifference is the mar"ina rate of su8stitution of return for ris.% 8% Cti it/ decreases as a consumer mo1es to the ri"ht a on" an indifference cur1e% c% A ris. a1erse consumer !i ha1e u$!ard s o$in" indifference cur1es% d% Cti it/ increases as indifference cur1es shift u$!ard% e% The s o$e of the indifference cur1e is the ratio of the mar"ina uti it/ for ris. and the mar"ina uti it/ of the e#$ected return%
&art II: Short Ans!er 6uestions
Short Answer Question #1: Simon Co!e o1es to consume $o$ music% 4ate / he is o8sessin" o1er t!o artists: D! Cit/ and 4ad/ 3a"a% Pe !ants to fi his i&od !ith nothin" 8ut D! Cit/ son"s +O, and 4ad/ 3a"a son"s +L,% ;urther, Simon has to d TMQ re$orters that his uti it/ function is:
UH
F O * > L) > *
a% 7hat is SimonJs mar"ina rate of su8stitution of D! Cit/ son"s for 4ad/ 3a"a son"s9
8% 7hat is SimonJs attitude to!ard ris. !hen it comes to consumin" D! Cit/ son"s +O,9 7hat a8out 4ad/ 3a"a son"s +L,9 Po! do /ou .no! this9
Su$$ose that 8oth artists ma.e a their son"s a1ai a8 e on iTunes for E1 a do!n oad and that Simon has E>- to s$end on music%
c% Csin" the 4a"ran"e mu ti$ ier method, so 1e for SimonJs o$tima consum$tion 8und e% Ae sure to sho! /our !or.%
No! ima"ine that Simon 8e ie1es 4ad/ 3a"a is on the 1er"e of a ne! hit% De$endin" on the success of her ne#t son", Simon has t!o sets of $references% If the son" is a success his uti it/ function is:
UH UH
F+O > ,+ L > ,
If the son" is a f o$, then his uti it/ function is:
1 +O ,+ L , *
d% If he is current / $urchasin" G units of O, ho! much ore additiona satisfaction does he "et from $urchasin" 3a"aJs ne#t son" if it is a hit, re ati1e to if it is a f o$9 Aased on /our ans!er !ou d /ou sa/ that a ife on" fan of 3a"a +i%e% a consumer !ho has accumu ated a ot of L, cares more than a first< time istener a8out !hether the ne#t son" is hit9
Short Answer Question #!: After considera8 e [Link] research, Netf i# has determined that their consumer 8ase is made u$ of t!o t/$es of consumers: T/$e A, !ho see Netf i# renta s and oca store renta s as hi"h / su8stituta8 e, and T/$e B, !ho $ ace a hi"h $remium on the con1enience of home
de i1er/ of renta s +i%e% 8/ mai , 8/ !e8, etc%,% Indi1idua s in these "rou$s are estimated to ha1e different demand functions: QA H 1*- *-+", QB H G- '+", !here Q # the num8er of Netf i# renta s each /ear and " # the $rice of a Netf i# renta % a% At !hat $rice does a T/$e A consumer ea1e the [Link]$ ace9 At !hat $rice does a T/$e B consumer ea1e the [Link]$ ace9 Dra! a "ra$h sho!in" demand functions for a sin" e consumer in each one of these "rou$s% Ae sure to sho! a /our !or.%
8% No! su$$ose there are 1-- consumers of T/$e A and 1,--- consumers of T/$e B% Dra! a "ra$h sho!in" demand functions for these "rou$s of consumers% Ae sure to sho! a /our !or.%
c% Csin" /our ans!er to $art +8,, ca cu ate tot$% consumer sur$ us if there are Netf i# current / char"es a $rice of E>% Shade these areas on the "ra$hs /ou su$$ ied from $art +8,%
If Netf i# raises the $rice of a renta to E>%-', !i that theoretica / "enerate more or ess tota e#$enditures for T/$e A consumers9 7hat a8out for T/$e B consumers9 7hat mi"ht Netf i# reasona8 / e#$ect !ou d ha$$en to tota re1enues if such a $rice in
