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Econ 203 Intermediate Microeconomics

Quiz 1

Attempt all questions and submit in groups.    (65 marks)

1. Using the assumptions about consumers’ preference, explain why all points along U₃ represent higher utilities than all points along U₂.   (10 marks)

  

2. Explain graphically what will happen for the consumer to maximize utility when MRS between two goods is larger than and smaller than the ratio of the prices of the goods. (10 marks)

3. John is considering his purchase of good X and good Y with P_x = $1 and P_y = $4. His utility function is given by U(X,Y) = X1/2+ 2Y1/2, and his income is I = $128.

a. Draw an indifference curve with the utility of 20. (5 marks)

b. Calculate the magnitude of the slope of indifference curve and budget line. (5 marks)

c. Find John’s optimal basket. Graphically explain your answer. (5 marks)

4. David is considering his purchase of good X and good Y with P_x = $10 and P_y = $20.  His utility function is U(X,Y) = X1/2 + Y1/2. His income is I = $120.

a. Calculate the magnitude of the slope of indifference curve and budget line.  (5 marks)

b. Find Dvaid’s optimal basket. Graphically explain your answer. (5 marks)

5. A university student, Peter, is considering his purchase of beer (good X) and cheesecakes (good Y). Price of beer is equal to $24 per bottle now and it will rise to $36. The price of cheesecakes is $12 per slice. His part-time income is $1,500 per month. His utility function is given by U = (XY)1/4.

a. Calculate the magnitude of the slope of indifference curve and budget line.  (5 marks)

b. Find Peter’s optimal basket. Graphically explain your answer. (5 marks)

Attempt all MC questions   (10 marks)

1) An upward sloping indifference curve defined over two goods violates which of the following assumptions from the theory of consumer behavior?

A) transitivity.

B) preferences are complete.

C) more is preferred to less.

D) all of the above

E) none of the above

2) The slope of an indifference curve reveals:

A) that preferences are complete.

B) the marginal rate of substitution of one good for another good.

C) the ratio of market prices.

D) that preferences are transitive.

E) none of the above

3) Bob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map.  Suppose the price of apples is $2 per pound, the price of oranges is $3 per pound, and Bob's budget is $30 per week.  What is Bob's utility maximizing choice between these two goods?  

A) 4 pounds of apples and 6 pounds of oranges

B) 5 pounds of apples and 5 pounds of oranges

C) 10 pounds of oranges and no apples

D) 15 pounds of apples and 5 oranges

E) none of the above

4) Sue views hot dogs and hot dog buns as perfect complements in her consumption, and the corners of her indifference curves follow the 45-degree line.  Initially, the price of hot dogs is $3 per package (8 hot dogs), the price of buns is $3 per package (8 hot dog buns), and Sue's budget is $48 per month.  How does her optimal consumption bundle change if the price of hot dog buns increases to $5 per package?

A) Sue does not change her consumption because these goods are perfect complements.

B) She buys the same amount of hot dog buns and buys more hot dogs.

C) She buys the same amount of hot dogs and buys two less packages of hot dog buns.

D) She reduces her consumption by 2 packages of hot dogs and 2 packages of hot dog buns.

5. Which of the following will result in a decrease in a consumer's purchasing power?

A) A decrease in the consumer's income

B) An increase in the price of the good on the vertical axis

C) An increase in the price of the good on the horizontal axis

D) all of the above

6. An increase in income, holding prices constant, can be represented as:

A) a change in the slope of the budget line.

B) a parallel outward shift in the budget line.

C) an outward shift in the budget line with its slope becoming flatter.

D) a parallel inward shift in the budget line.

7. Assume that food is measured on the horizontal axis and clothing on the vertical axis. If the price of food falls relative to that of clothing, the budget line will:

A) become flatter.

B) become steeper.

C) shift outward.

D) become steeper or flatter depending on the relationship between prices and income.

  

Figure 3.3 

8) Refer to the indifference curve in Figure 3.3.  Which of the following statements is correct?

A) This individual receives no satisfaction from Good A.

B) This individual receives no satisfaction from Good B.

C) This individual will only consume A and B in fixed proportions.

D) none of the above

9) Refer to the indifference curve in Figure 3.3.  Which of the following statements about marginal utility (MU) is correct?

A) MU(A) = 0.

B) MU(B) = 0.

C) MU(A) is negative.

D) MU(B) is negative.

10) Which of the following is NOT an assumption regarding people's preferences in the theory of consumer behavior?

A) Preferences are complete.

B) Preferences are transitive.

C) Consumers prefer more of a good to less.

D) All of the above are basic assumptions about consumer preferences.