Principles of Microeconomic Theory 1: Problem Set 5
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Principles of Microeconomic Theory 1: Problem set 5.
Part A：Multiple choice questions.
Question 1. suppose that preferences over bundles of goods are represented by:
U(q1 , q2 ) = min {q1 , q2 } .
The consumer faces prices p1 , p2 > 0. Then, the expenditure function associated with these preferences is given by:
(a) E(p1 , p2 , U) = U.
(b) E(p1 , p2 , U) = min {p1 U, p2 U }.
(c) E(p1 , p2 , U) = p1 U.
(d) E(p1 , p2 , U) =(p1 + p2 ) U.
(e) E(p1 , p2 , U) = 
.
Question 2. A consumer,s expenditure function is given by:
E(p1 , p2 , u) = 2u4p1 4p2 .
Then, the Hicksian compensated demand for good 1 is given by which one of the following?
(a) q1 = 2u4p2 .
1
(b) q1 = u 
2 .
(c) q1 = u 
2 .
(d) q1 = 
p2 .
(e) q1 = 2u.
Question 3. which one of the following statements is incorrect?
(a) If Hicksian demand is steeper than Marshallian demand, then 'cV' > 'EV' .
(b) If Hicksian demand is latter than Marshallian demand, then 'cV' < 'EV' .
(c) For normal goods it must hold that 'cV' > 'EV' .
(d) For normal goods, it must hold that 'cV' < 'EV' .
(e) For inferior goods, it must hold that 'cV' < 'EV' .
Part B：written answer question.
Question 4. suppose that a consumer,s preferences are represented by:
U(q1 , q2 ) =“q1 “q2 .
The consumer has income Y = f2, 400. Initially, the prices of goods 1 and 2 are p1 = f30 and p2 = f40.
A shock to the economy raises the price of good 1 by 50%.
Measure the welfare impact of this shock using the compensating variation approach.
2023-08-28