econ

Exam 1 Questions Exam 1 consists of 40 questions (true/false, which hopefully is obvious), selected randomly and separately for each of you, from the list below: 7 from Chapter 1, 5 from Chapter 2, 7 from Chapter 3, 9 from Chapter 4, and 12 from Chapter 5. Exam questions will be in chapter order, so the first 7 will be from Chapter 1, the next 5 from Chapter 2, etc., but question ordering within each chapter is random (thank ICON, not me). The exam reminder announcement will contain more details. Chapter 1 1. Assuming that consumer choice is based on preferences implies that people are selfish. 2. A fundamental assumption of consumer choice theory about preferences is that for any two

bundles A and B, we know whether we prefer A or B, or each equally. 3. In consumer choice theory, it’s possible for three bundles A, B, and C that A is preferred to B, B is

preferred to C, and C is preferred to A. 4. In consumer choice theory, more is not always better. 5. The fundamental assumptions that consumer choice theory makes about preferences are less

likely to hold in the presence of uncertainty. 6. All bundles along the same indifference curve are equally preferred. 7. In the graph below, B is preferred to A and A is preferred to C. 8. In the graph below, A, B, and C are all preferred to D. 9. In the graph below, it is unclear whether E is preferred to B or C, since each represents more of

one good but less of the other.

10. The left graph below exhibits an indifference curve that satisfies all fundamental assumptions

about preferences. 11. The right graph below is not a valid depiction of an individual consumer’s indifference curves

because equally preferring all four bundles violates fundamental assumptions about preferences.

12. The MRS is the slope of the indifference curve. 13. The MRS cannot be positive. 14. MRS = ΔX/ΔY holding constant utility. 15. The MRS is the same for all bundles on the same indifference curve. 16. Indifference curves depicting well-behaved preferences are shaped like those in the graphs below

because consumers tend to like variety. 17. The MRS between the top & middle bundles on the left graph below is –2.5. 18. The MRS between the middle & right bundles on the left graph below is –2.5. 19. On the upper bundle of the right graph below, the consumer is willing to give up 1 sandwich in

exchange for 3 burritos to stay equally well off. 20. On the lower bundle of the right graph below, the consumer is willing to give up 1 sandwich in

exchange for 3 burritos to stay equally well off.

21. Perfect complements are consumed only in fixed proportions. 22. In the left graph below, earbuds and iPods are perfect complements. 23. In the right graph below, butter and margarine perfect complements.

24. Perfect substitutes are consumed only in fixed proportions. 25. Left shoes and right shoes are an example of goods that are perfect substitutes. 26. Aquafina and Dasani brands of bottled water are likely to be perfect substitutes for many

consumers. 27. Two goods are perfect complements only if they are consumed exactly in a one-to-one ratio. 28. Brownies and chocolate chip cookies are perfect substitutes if trading off exactly one brownie for

exactly two chocolate chip cookies always leaves the consumer equally well-off. 29. Starting from the bundle shared by all three indifference curves, the left graph below shows how

perfect complements and perfect substitutes are extreme cases of standard preferences. 30. Indifference curves for a consumer who likes driving more than reflected in the right graph below

would be flatter than the one shown here.

MRS = –3

MRS = –1/3

4

4

10

25

10 25 Burritos

Chapter 2 31. A utility function evaluated at one specific value of utility is the mathematical equivalent of a

single indifference curve. 32. Bundle X that provides 9 utils might, or might not, be on the same indifference curve as bundle Y

that provides 7 utils. 33. Bundle X that provides 23 utils is preferred to bundle Y that provides 18 utils. 34. Bundle X that provides 50 utils is considered exactly 25% better than bundle Y that provides 40

utils. 35. Utility functions U(A, B) and V(A, B) represent different preferences if V(A, B) = U(A, B) – 3. 36. Utility functions U(A, B) and V(A, B) represent identical preferences if V(A, B) = 3 × U(A, B). 37. If U(A, B) = min(0.4A, 0.6B), goods A and B are perfect complements. 38. If U(A, B) = 0.7A + 0.3B, goods A and B are perfect substitutes. 39. The general form of the Cobb-Douglas utility function is U(A, B) = αA × βB.

40. A drawback of the Cobb-Douglas utility function U(A, B) is that A and B are always equally preferred, i.e. the strength of preference is always the same for A and B.

41. For the Cobb-Douglas utility function with α = β = 0.5, the indifference curve corresponding to a

utility of 12 utils is B = 144/A. 42. For the Cobb-Douglas utility function with α = β = 0.5, the indifference curve corresponding to a

utility of 20 utils is B = 40/A. 43. For the Cobb-Douglas utility function with α = 2/3 and β = 1/3, the indifference curve

corresponding to a utility of 3 utils is B = 27A–2. 44. For the Cobb-Douglas utility function with α = 1/3 and β = 2/3, the indifference curve

corresponding to a utility of 5 utils is B = 125A–2. 45. If U(4, 3) = 8 and U(6, 3) = 28, MUA = 20. 46. If U(2, 2) = 5 and U(2, 7) = 35, MUB = 6. 47. If utility is a function of pizza and beer, the table below, which reflects holding constant beer

consumption (at a low number!), indicates diminishing marginal utility for pizza. 48. If utility is a function of pizza and beer, the graph below, which reflects holding constant beer

consumption (still at a low number), indicates increasing marginal utility for pizza.

Pizza slices Utility

0 20

1 32

2 41

3 47

4 50

5 50

49. The assumption that consumers like variety stems directly from the principle of diminishing

marginal utility. 50. Indifference curves for well-behaved preferences being bowed in, i.e. convex to the origin, stems

directly from the principle of diminishing marginal utility. 51. If U(12, 9) = 33, U(13, 9) = 36, and U(12, 10) = 39, then the MRS at (A, B) = (12, 9) is –2. 52. If U(5, 8) = 40, U(6, 8) = 44, and U(5, 10) = 44, then the MRS at (A, B) = (5, 8) is –1/2. Chapter 3 53. For the budget constraint 2A + 3B ≤ 15, the price of good A is $2. 54. For the budget constraint 2A + 3B ≤ 15, the price of good B is $5. 55. For the budget constraint 2A + 3B ≤ 15, income is $5. 56. The budget constraint corresponding to PA = $4, PB = $1, and I = $20 is 4A + B ≤ 20. 57. Given budget constraint 2A + 3B ≤ 15, (A, B) = (2, 2) is a possible utility-maximizing bundle. 58. Given budget constraint 2A + 3B ≤ 15, (A, B) = (3, 3) is a possible utility-maximizing bundle. 59. Given budget constraint 2A + 3B ≤ 15, (A, B) = (4, 4) is a possible utility-maximizing bundle. 60. If the table below represents various combinations of energy bars & bottles of water that can be

purchased for $18, PA = $0.90. 61. If the table below represents various combinations of energy bars & bottles of water that can be

purchased for $18, PB = $1.80.

Energy bars Bottles of water

20 0

16 3

12 6

8 9

4 12

0 15

62. For the budget constraint 5A + 8B ≤ 80, Ā = 16 in the graph below. 63. For the budget constraint 5A + 8B ≤ 80, Ḇ = 10 in the graph below. 64. For the budget constraint 5A + 8B ≤ 80, slope = 8/5 in the graph below.

2 0

3 0

4 0

5 0

U ti li ty

0 1 2 3 4 5 Pizza slices

65. If one piece of sushi costs $2 and a Sapporo costs $3, the opportunity cost of a piece of sushi is

2/3 of a Sapporo. 66. If one piece of sushi costs $2 and a Sapporo costs $3, the opportunity cost of a Sapporo is 2/3 of

a piece of sushi. 67. In the graph below, a shift in the budget line from A to C represents an increase in the price of

milk, holding constant income and the price of soda. 68. In the graph below, a shift in the budget line from A to B represents a decrease in the price of

milk, holding constant income and the price of soda. 69. In the graph below, a shift in the budget line from C to B represents an increase in the price of

soda, holding constant income and the price of milk. 70. In the graph below, a shift in the budget line from B to A represents a decrease in the price of

soda, holding constant income and the price of milk. 71. In the graph below, a shift in the budget line from C to A represents an increase in income,

holding constant prices. 72. In the graph below, a shift in the budget line from B to C represents a decrease in income,

holding constant prices. 73. In the graph below, a discount on milk (but not soda) would be represented by a shift in the

budget line from B to A. 74. In the graph below, a discount of 1/3 (i.e. 33-1/3%) on both milk and soda would be represented

by a shift in the budget line from C to B. 75. In the graph below, a 100% tax on soda (but not milk) would be represented by a shift in the

budget line from A to B. 76. In the graph below, a 50% tax on both milk and soda would be represented by a shift in the

budget line from B to C.

slope

Ā

Ḇ B

77. A discount on 3 cans of Monster Energy (on the x-axis) results in a budget line that is flatter, compared with no discount, but only for the first 3 cans of Monster Energy.

78. A discount on 3 cans of Monster Energy does not change the Monster Energy intercept of the budget line compared with no discount.

79. A discount on 3 cans of Monster Energy does not change the “spending on all other goods” intercept of the budget line compared with no discount.

80. A voucher for 3 free cans of Monster Energy (on the x-axis) results in a budget line that is horizontal, compared with no voucher, but only for the 4th and additional cans of Monster Energy.

81. A voucher for 3 free cans of Monster Energy increases the Monster Energy intercept of the budget line compared with no voucher.

82. A voucher for 3 free cans of Monster Energy increases the “spending on all other goods” intercept of the budget line compared with no voucher.

83. When deciding between spending money on miles of driving vs. all other goods, a fuel efficiency increase that raises miles per gallon of motor vehicles by 50% would increase the miles driven intercept of the budget line by 50%.

84. When deciding between spending money on miles of driving vs. all other goods, a fuel efficiency increase that raises miles per gallon of motor vehicles by 50% would increase the “spending on all other goods” intercept of the budget line by 50%.

Chapter 4 85. The most preferred of the four bundles in the graph below is bundle 4. 86. In the graph below, the solution to the consumer choice problem is bundle 3. 87. For bundle 1 in the graph below, MUA/PA < MUB/PB. 88. For bundle 2 in the graph below, MUA/PA > MUB/PB.

89. If utility is a function of pizza (Z) and beer (B), PZ = $2, and PB = $3, then to maximize utility

subject to your budget constraint, MUZ/MUB must equal 1.5. 90. If utility is a function of pizza (Z) and beer (B), PZ = $2, PB = $3, and MUZ = 6, you are not

maximizing utility subject to your budget constraint unless MUB = 9. 91. If utility is a function of pizza (Z) and beer (B), PZ = $2, PB = $3, and MUZ = MUB, you are not

maximizing utility subject to your budget constraint. 92. If utility is a function of pizza (Z) and beer (B), PZ = $2, and PB = $3, any combination of pizza

and beer for which MUZ/2 = MUB/3 represents a bundle that maximizes utility subject to your budget constraint.

93. If utility is a function of pizza (Z) and beer (B), reallocating your last dollar of spending from pizza to beer increases MUZ.

94. If utility is a function of pizza (Z) and beer (B), reallocating your last dollar of spending from pizza to beer increases MUB.

95. Solving the consumer choice problem simply means finding the one bundle on the budget line for which the marginal utilities and prices of the two goods have the same ratio.

96. Solving the consumer choice problem simply means finding the one bundle on the budget line for which the next dollar spent on each good would provide the same increase in utility.

97. For a Cobb-Douglas utility function with α = β = 0.5, MRS = –B/A.

98. For a Cobb-Douglas utility function with α = 1/3 and β = 2/3, MRS = –1/2 × B/A.

99. For any Cobb-Douglas utility function, when the two goods have the same price, utility is maximized only when the same amount of each good is consumed.

100. For a Cobb-Douglas utility function, if the two goods have the same price, α = 0.75, and β =

0.25, utility is maximized only when B = 3A. 101. In Cobb-Douglas utility function with positive exponents, goods are always normal (not inferior). 102. Cobb-Douglas utility functions with positive exponents obey the law of demand. 103. Cobb-Douglas utility functions always represent the goods under consideration as complements. 104. In Cobb-Douglas utility functions, demand for each good increases as its exponent decreases. 105. In Cobb-Douglas utility functions, demand for each good increases as the exponent of the other

good decreases. 106. Cobb-Douglas utility functions, and well-behaved preferences more generally, nearly always

produce corner solutions to the consumer choice problem. 107. Perfect complements always have interior solutions to the consumer choice problem. 108. Perfect substitutes always have interior solutions to the consumer choice problem. 109. For perfect complements, if α = 0.8 and β = 0.2, utility is maximized only when B/A = 4.

110. For perfect complements, if α/β increases from 1 to 2, A*/B* likewise increases from 1 to 2.

111. For perfect complements, optimal consumption of both goods decreases when income increases.

112. For perfect complements, a decline in the price of one good raises optimal consumption of both goods.

113. For perfect substitutes, the consumer choice problem is solved by consuming only the good for which marginal utility per dollar is higher.

114. For perfect substitutes, the consumer choice problem is solved by consuming only A when, in comparison to the budget constraint, indifference curves are flatter, and only B when they are instead steeper.

115. For well-behaved preferences, graphical analysis suggests that a policy which doubles fuel efficiency is unlikely to alter fuel consumption.

116. For well-behaved preferences, graphical analysis suggests that a policy which doubles fuel efficiency is unlikely to reduce fuel consumption by 50%.

117. For well-behaved preferences, graphical analysis suggests that some of the savings from a policy that lowers the price of driving are likely to be spent on other goods.

118. Separately from the theoretical analysis, empirical estimates suggest that increases in fuel efficiency are almost entirely spent on additional driving rather than other goods.

119. In a Cobb-Douglas utility function, all savings from increases in fuel efficiency would be spent on additional driving rather than other goods.

120. In a Cobb-Douglas utility function, a policy that increases average MPG from 20 to 30 on average would reduce fuel consumption by one-third.

Chapter 5 121. The graph below illustrates the law of demand for burritos. 122. The graph below illustrates the law of demand for pizza.

123. In the graph below, burritos and pizza are substitute goods.

124. In the graph below, the law of demand is illustrated by the quantity of Y demanded increasing

as the budget constraint moves from BC1 to BC2 to BC3. 125. In the graph below, the law of demand is illustrated by the quantity of X demanded decreasing

as the budget constraint moves from BC1 to BC2 to BC3. 126. In the graph below, X and Y are substitute goods. 127. In the graph below, if P1 = $2 and the Y intercept for BC1 is 9, then total income available is

$18. 128. In the graph below, if P2 = $1.20, the Y intercept for BC2 is 15, and X2 = 6, then the price of

good X is $3.

129. In the graph below, moving from the top to bottom indifference curve, the price of a ticket

increases from $8 to $16 to $24.

130. In the graph below, C1 = $72. 131. In the graph below, C2 = $48. 132. In the graph below, C1 = $36.

133. If the market consists of 100 consumers with the demand curve depicted below, market

quantity demanded at P = $1 is 600. 134. If the market consists of 100 consumers with the demand curve depicted below, market

quantity demanded at P = $0.50 is 300.

135. If a market consists of three consumers with demand curves p = 90 – 2q1, p = 60 – q2, and p =

30 – 0.5q3 (equivalent to q1 = 45 – 0.5p, q2 = 60 – p, and q3 = 60 – 2p), market demand qM at prices above $60 is qM = 45 – 0.5p.

136. If a market consists of three consumers with demand curves p = 90 – 2q1, p = 60 – q2, and p = 30 – 0.5q3 (equivalent to q1 = 45 – 0.5p, q2 = 60 – p, and q3 = 60 – 2p), market demand qM at prices between $30 and $60 is qM = 150 – 3p.

137. If a market consists of three consumers with demand curves p = 90 – 2q1, p = 60 – q2, and p = 30 – 0.5q3 (equivalent to q1 = 45 – 0.5p, q2 = 60 – p, and q3 = 60 – 2p), market demand qM at prices below $30 is qM = 165 – 3.5p.

138. A decrease in the price of coffee causes a downward movement along the demand curve for coffee.

139. If coffee is a normal good, an increase in income causes an upward movement along the demand curve for coffee.

140. If coffee and donuts are complements, an increase in the price of donuts causes a rightward shift in the demand curve for coffee.

141. If coffee and tea are substitutes, a decrease in the price of tea causes a leftward shift in the demand curve for coffee.

142. Recent news that coffee provides surprising health benefits is unlikely to affect the demand curve for coffee, since it does not affect prices of related goods or consumer income.

143. If a 10% decline in price results in a 2% increase in quantity demanded, E = –5. 144. If a 5% increase in price results in a 4% reduction in quantity demanded, E = –0.8. 145. If increasing the price of a ticket to a UI basketball game from $20 to $24 lowers the quantity

of tickets demanded from 10,000 to 7,000, E = –1.5. 146. If raising the price of the classic yellow-on-black Hawkeye face mask from $8 to $10 reduces

the weekly quantity of masks demanded from 1,000 to 900, E = –2.5. 147. E = –0.3 represents price-elastic demand. 148. E = –3 represents price-inelastic demand. 149. E = –0.1 represents unit elastic demand with respect to price. 150. A perfectly price-elastic linear demand curve is horizontal at the prevailing price. 151. A perfectly price-inelastic linear demand curve is vertical at the prevailing quantity. 152. Comparing two linear demand curves passing through the same price and quantity combination,

the flatter curve is more price-elastic. 153. A linear demand curve is price-inelastic if its slope is between 0 and –1. 154. Price elasticity decreases moving downward along a linear demand curve. 155. Positive cross-price elasticities violate the law of demand. 156. Negative cross-price elasticities indicate that the corresponding goods are substitutes. 157. Inferior goods have negative income elasticities of demand. 158. Goods are less likely to be inferior the more broadly they are defined, i.e. specific types or

brands of products are more likely to be inferior than is the product as a whole. 159. For the demand curve Q = 400 – 6P, when P = 50, E = –3. 160. For the demand curve Q = 400 – 6P, when P = 25, E = –1. 161. The substitution effect of a price increase represents the change in quantity demanded that

would result if the higher price did not make consumers any worse (or better) off. 162. For Giffen goods, substitution effects are positive, meaning they indicate quantity demand

moving in the same direction as price even net of income effects. 163. For normal goods, the law of demand results from price increases both inducing substitution

into cheaper goods and less income being available to buy the same amount of the good as before the price increase.

164. Income effects of price increases always make consumers worse off, regardless of whether the good is normal or inferior.

165. All inferior goods are also Giffen goods. 166. Most Giffen goods are normal, not inferior, goods. 167. For Giffen goods, a price decrease lowers consumer utility. 168. For Giffen goods, E > 0. 169. For Giffen goods, demand curves are upward-sloping. 170. If Iowa City has 2,100 parking spaces and wants to leave an average of 100 spaces open, and

faces the hourly parking demand function Q = 4,000 – 1,000P, it should set an hourly parking rate of $2.

171. If E = –0.5 for Iowa City parking spaces and the city wants to increase parking demand by 20%, it should lower the currently hourly rate of $1.50 to $1.35.

172. Demand in urban areas for highway lanes that charge tolls is likely to be more price-elastic during busier hours.