ECON 310 – Spring 2007 (ticket #15619) Name: ______________________ Exam 1 - Version B Multiple Choice: (4 points each) 1) The income elasticity of demand for margarine is -0.20. This value suggests that a. a slight increase in the price of margarine would increase total consumer expenditures on margarine. b. butter is a substitute for margarine. c. margarine is an inferior good. d. margarine is a normal good. e. More than one, perhaps all, of the above answers must be correct. 2) An Engel Curve a. directly illustrates the relation between the amount purchased of a commodity and it’s own price, holding constant income and all other prices. b. directly illustrates the relation between the amount purchased of a commodity and the level of income, holding constant all prices. c. will be negatively sloped for a normal good. d. is the same thing as a demand curve. e. More than one, perhaps all, of the above answers is correct. 3) Chad’s preferences over beer and pretzels are “monotonic.” This means that a. if BA f and CB f , then CA f . b. the bundle )10,4(=A must be more desirable than the bundle )15,2(=B . c. given a choice between any two consumption bundles, he is able to say which one he prefers. d. “more is better,” in that increased consumption of all goods would make him better off. e. None of the above answers are correct. 4) If the “Law of Demand” holds, then a. the corresponding demand curve will be upward sloping. b. in equilibrium there will be “excess demand.” c. there is an “inverse relation” between price and quantity demanded. d. consumers are clearly NOT maximizing utility. e. None of the above answers are correct. 5) Rory’s marginal utility for pizza a. provides a measure of how his utility changes as he consumes more pizza (with consumption of all other goods fixed). b. provides a measure of the degree to which he would substitute tacos for pizza. c. must be negative if his preferences are “transitive.” d. must be equal to zero if his preferences are “monotonic.” e. None of the above answers are correct.6) Consider a market in which demand is given by the function ppD 290)( −= and supply is given by the function ppS 4)(=. In equilibrium a. 15 units will be traded. b. 60 units will be traded. c. trade will take place at a price of $60 per unit. d. there is “excess supply.” e. More than one of the above answers is correct. 7) A “good economic model” a. should match the real world exactly. b. should never contain any exogenous variables. c. should never contain any endogenous variables. d. is not useful for making insights into how the real world functions. e. None of the above answers are correct. 8) Michelle has income of 150=I , which she devotes to consumption of 1x and 2x. Each unit of 1x costs 31=p ; each unit of 2x costs 52=p . If her income were to decrease to 125=I (with prices fixed), then her budget line would a. shift inward. b. shift outward. c. become steeper. d. become flatter. e. More than one of the above answers is correct. 9) Consider the market for “Los Angeles Clippers basketball jerseys.” Between 2005 and 2007 equilibrium price and equilibrium quantity in this market both increased. Which of the following are possible explanations of this observed change in equilibrium? a. “A decrease in Demand, with no change in Supply.” b. “A simultaneous decrease in Demand and decrease in Supply.” c. “A simultaneous increase in both Demand and Supply.” d. “An increase in Supply, with no change in Demand.” e. More than one of the above explanations is possibly correct. 10) Suppose the price of good one decreases, with income and all other prices fixed. The Compensating Variation in Income a. is equal to the amount of additional income that the consumer would have to be given in place of the price decrease, so that she would be exactly as well-off as she is after the price decrease with her actual income. b. is equal to the amount of money that could be taken away from the consumer after the price decrease, so that she is exactly as well-off as she was before the price change with her actual income. c. must always be exactly equal to the change in Consumer’s Surplus brought about by the price decrease. d. is equal to the area below the demand curve but above price paid over all units of the good which are consumed. e. More than one of the above answers is correct.11) Jason likes both =1x (peanut butter) and =2x (strawberry jam). He always gets the same additional satisfaction from “two more ounces of peanut butter” as he does from “one more ounce of strawberry jam.” Which of the following utility functions is consistent with these preferences? a. ()21212, xxxxU = b. ()21212, xxxxU += c. () { }21212,min, xxxxU = d. ()21212, xxxxU += e. Any of the above utility functions is consistent with the stated preferences. 12) When the price of pizza decreases from 12=p to 10ˆ=p Joe’s monthly consumption increases from 5=q to 9ˆ=q. When decomposing this change into a Substitution Effect and an Income Effect, we see that the Substitution Effect results in a 3 unit increase in his consumption of pizza. From this information, we know that a. pizza is a normal good for Joe. b. pizza is a Giffen good for Joe. c. the Income Effect results in a 1 unit increase in his consumption of pizza. d. the Income Effect results in an 4 unit increase in his consumption of pizza. e. More than one of the above answers is correct. 13) The value of Indirect Utility should a. increase if the price of good one were to decrease. b. decrease if the price of good two were to increase. c. increase if income were to increase. d. All of the above answers are correct. e. More than one, but not all, of the above answers is correct. 14) In a “Constrained Optimization Problem,” the “Objective Function” refers to a. the set of restrictions on the choice of the decision maker. b. the relationship that the decision maker wants to maximize or minimize. c. the variables which the decision maker gets to choose the value of. d. an analysis which examines how equilibrium values change as a result of changes in exogenous factors. e. a “stable state,” that will persist as long as factors exogenous to the system remain