economics assignment

INTERMEDIATE ECONOMICS (ECON 021)

MIDTERM EXAM 1

July/17/2020

STUDENT NAME: …………………………………………………. SCORE………/55

Answer All Questions (Time Allowed: 105 Minutes)

PART I: Multiple choice (only 25 questions) 25 marks

1. True/False

1. More is preferred to less means that if the total number of goods in bundle A exceeds the total quantity in B, than A is preferred to B.

TRUE FALSE

2. An exact measure of the individual's willingness to pay for the opportunity to purchase an automobile at some price is the consumer surplus.

TRUE FALSE

3. Assume that a certain individual consumes only goods 1 and 2. If the prices of good 1 and good 2 double and his income doubles, then the quantity demanded for goods 1 and 2

will not change.

TRUE FALSE

4. The assumptions of completeness, two-term consistency, transitivity and continuity are necessary for constructing a utility function over a set of preferences.

TRUE FALSE

5. The utility function V(x1, x2) = 5[U(x1, x2)]/2+7 represents the same preference ordering as the utility function U(x1, x2).

TRUE FALSE

6. A diminishing marginal rate of substitution implies that an individual requires increasing amounts of one good as he gives up more and more of the other good to remain at the

same utility level.

TRUE FALSE

7. If, at the utility maximizing bundle of good 2 and good 1, the MRS of good 2 for good 1 is greater than p1/p2, then good 1 is an inessential good.

TRUE FALSE

8. The MRS for indifference curve x1 + x2 =c is diminishing.

TRUE FALSE

Consider the following list of statements. Each statement in the list means the same thing as one

of the other statements. Identify the pairs of statements which are equivalent: (Your answer

should be written as Q9-Q11 using the alphabets) a) Consumers always prefer to have more of a good

b) Consumers' preferences are complete

c) Consumers' preferences are transitive

d) Every market basket has an indifference curve associated with it

e) Indifference curves are convex

g) Indifference curves do not cross

9.

10.

11.

12. Which is an explanation for why the demand curve is downsloping? a. normal goods b. the law of supply c. the law of diminishing marginal utility d. the law of increasing opportunity cost

13. A consumer is in equilibrium and is spending income in such a way that the marginal utility of product X is 40 units and Y is 16 units. The unit price of X is $5. The price of Y

is:

a. $1 per unit.

b. $2 per unit.

c. $3 per unit.

d. $4 per unit.

14. If the consumer can only buy product X, how much will the consumer buy and what will be the total utility?

a. 4X and 20

b. 4X and 104

c. 5X and 16

d. 5X and 120

15. If the consumer buys both product X and product Y, how much will the consumer buy of each to maximize utility?

a. 4X and 2Y

b. 3X and 4Y

c. 4X and 3Y

d. 5X and 3Y

16. When the consumer purchases the utility-maximizing combination of product X and product Y, total utility will be:

a. 72.

b. 84.

c. 136.

d. 156.

17. A consumer with a fixed income will maximize utility when each good is purchased in amounts such that the:

a. total utility is the same for each good.

b. marginal utility of each good is maximized.

c. marginal utility per dollar spent is the same for all goods.

d. marginal utility per dollar spent is maximized for each good.

18. Consumption of a free good will be carried to the point at which:

a. the marginal utility derived from the good equals the marginal utility derived from the

consumption of all other goods.

b. the marginal utility derived from the good begins to decline.

c. the total utility derived from the good is maximised.

d. the total utility derived from the good equals the total utility derived from the

consumption of all other goods.

19. George consumes only two goods, pizza and compact discs. Both are normal goods for George. Suppose the price of pizza decreases. George's consumption of compact discs

will:

a. increase due to the income effect.

b. increase due to the substitution effect.

c. increase due to a negative income elasticity.

d. remain unchanged, since the income elasticity of pizza is greater than 0.

20. The total utility of a product is calculated by: a. summing the marginal utility from the first unit of a product that is consumed and the

last unit of a product that is consumed.

b. multiplying the marginal utility of a unit of the product consumed times the average

quantity consumed.

c. summing the marginal utilities for each successive unit of the product that is

consumed.

d. multiplying price times quantity and dividing by the marginal utility.

21. When marginal utility is decreasing but positive, total utility is: a. increasing at a decreasing rate. b. decreasing at a decreasing rate. c. increasing at an increasing rate. d. decreasing at an increasing rate.

22. Which best describes a demand curve? a. The quantity consumers would like to buy in an ideal world

b. The quantity consumers are willing to sell

c. The quantity consumers are willing and able to buy at each and every income all

other things unchanged

d. The quantity consumers are willing and able to buy at each and every price all other

things unchanged

23. According to the law of diminishing marginal utility: a. Utility is at a maximum with the first unit

b. Increasing units of consumption increase the marginal utility

c. Marginal product will fall as more units are consumed

d. Total utility will rise at a falling rate as more units are consumed

24. An increase in price, all other things unchanged, leads to: a. Shift demand outwards b. Shift demand inwards c. A contraction of demand d. An extension of demand

25. A consumer with a given income will maximise their utility when: a. the marginal utilities derived from each commodity consumed are proportional to their

prices.

b. the marginal utility derived from each commodity is equal.

c. the marginal utility derived from each product consumed is zero.

d. the total utility derived from each commodity consumed is equal.

PART II: Short Answers (10 Marks each)

1. Explain the assumptions underlying consumer preferences. (3 Marks each) i.

ii.

iii.

2. Jessie’s demand function for tuna is given by: q=2m/5p where q is the number of cans of tuna demanded, p is the price of tuna, and m is her income. Suppose

Cari's income is $100. If the price of tuna falls from $5 to $4, what happens to

the demand for tuna? (2 Marks each)

3. Pattison spends all his money on two goods: Hot pot and ‘Chaofan’. Can both of them be inferior? Explain. (2 Marks each)

4. Mention three properties of preference ordering (3 Marks each) i.

ii.

iii.

Part III: Comprehensive Question. (20 marks)

Answer only TWO questions in this part. All questions carry equal marks

1. Find the demand functions for the individual below when the budget constraint is pxx+pyy=m

Cao JingJing: U(x, y) = (x+1) 2 (y+2)

3

2. With graphical illustration, explain the concept of consumer surplus.

3. Wen Hao likes to consumer flight services because he has an ambition to tour all of South-East Asia. His demand for flights is represented by the function q =

10 - 2p

a. What is the price elasticity of demand when the price of flight is 3? b. At what price is the elasticity of demand equal to -1? c. Suppose that his demand function takes the general form q = a – bp, what

will be his elasticity of demand (in algebraic terms) at price p.