ECON 310 – Spring 2006 (ticket #16386) Name: _A. Key________________ Exam 1 - Version A Multiple Choice: (circle the letter of the best response; 4 points each) 1) The Income Elasticity of Demand for “product X” is estimated to be 27.,=IXε. Based upon this value, we can infer that c. “product X” is a normal good. 2) Rory’s marginal utility for pizza b. provides a measure of how his utility changes as he consumes more pizza (with consumption of all other goods fixed). 3) Consumer’s Surplus e. All of the above answers are correct. 4) Consider a market in which demand is given by the function ppD 3100)( −= and supply is given by the function ppS 2)(=. In equilibrium b. 40 units will be traded. 5) Michelle has income of 100=I , which she devotes to consumption of 1x and 2x . Each unit of 1x costs 21=p ; each unit of 2x costs 52=p . If her income were to increase to 125=I (with prices fixed), then her budget line would a. shift outward. 6) The “Price Consumption Curve (for commodity one)” directly illustrates c. the utility maximizing combinations of commodity one and commodity two as the price of commodity one is varied, all other factors fixed. 7) Which of the following is NOT one of the “three basic analytical tools” (or “three key analytical tools”) upon which nearly all microeconomic analysis relies? b. Indirect Utility. 8) Consider the market for “Los Angeles Lakers basketball jerseys.” Between 2004 and 2006 equilibrium price and equilibrium quantity in this market both increased. Which of the following are possible explanations of this observed change in equilibrium? e. More than one of the above explanations could be correct. 9) Suppose the price of good one decreases, with income and all other prices fixed. The Equivalent Variation in Income a. specifies the amount of additional income that the consumer would have to be given in place of the price decrease, so that she would be just as well off as she is after the price decrease with her actual income.10) Jason likes both =1x (peanut butter) and =2x (grape jelly). He always gets the same additional satisfaction from “3 more ounces of peanut butter” as he does from “one more ounce of grape jelly.” Which of the following utility functions is consistent with these preferences? c. ()21213, xxxxU += 11) This consumer considers the bundle )2,35(),(21=xx to be c. exactly as desirable as the bundle )4,15(),(21=xx . 12) If this consumer were to purchase 42=x , how many units of good one could she purchase when spending all of her income? b. 251=x . 13) In order to maximize utility, this consumer should purchase the bundle c. )6,15(=X . 14) Based upon the shape of the isoquants above, it appears as if d. KLMRTS, is diminishing. 15) Which of the following production functions is possibly consistent with the isoquants illustrated above? d. LKKLF41),( = 16) If this production process is characterized by “Increasing Returns to Scale,” then c. 250>q . 17) The “Marginal Product of Labor” a. provides a measure of how output changes as more labor is hired (with the level of capital fixed). 18) Consider a consumer with utility of 21)( xxXU+=. If 21=p , 32=p , and 120=I , this consumer would maximize utility by purchasing c. 60 units of good one and 0 units of good two. 19) Bob’s preferences over 1x and 2x are transitive and monotonic. Comparing the bundles )8,4(=A , )6,10(=B , and )5,3(=C , it must be that b. CA ; .20) A consumer with 21)( xxXU += maximizes utility by purchasing +=2112*1ppIppx and +=2121*2ppIppx. It follows that Indirect Utility is given by the function c. 212121212112)(ppppIppIppppIpp +=+++ 21) When the price of pizza decreases from 10=p to 8ˆ=p Joe’s monthly consumption of pizza increases from 5=q to 12ˆ=q . When decomposing this change into a Substitution Effect and an Income Effect, we see that the Substitution Effect results in a 4 unit increase in his consumption of pizza. From this information, we know that c. the Income Effect results in a 3 unit increase in his consumption of pizza.“Short Answer” Question: 1. Noel’s Income Consumption Curve is illustrated below. The current price of cigarettes is 5=cp . Also illustrated are two possible budget lines (given the current price ratio), one associated with a “high level of income” (denoted by HI ), the other associated with a “low level of income” (denoted by LI ). From the numerical values in the graph below, it could be shown that 100=LI . Answer the following questions based upon this graph. a. What is the current price per unit of alcohol? Explain. (4 points) 100==LII along the budget line closer to the origin. Therefore, 10=aLpI ⇒ 5100=ap ⇒ 205100==ap . b. If Noel’s actual income is 100=LI , are cigarettes a “normal good” or an “inferior good”? Explain. (6 points) 100==LII along the budget line closer to the origin. The Income Consumption Curve is positively sloped at this point, indicating that a slight increase in income would result in increased consumption of both goods. Therefore, cigarettes are a normal good in this case. Alcohol 0 0 Cigarettes ICC 40 10 5 20c. Suppose instead that Noel’s income is 200=I . Should his Income Elasticity of Demand for alcohol be positive, negative, or equal to zero? Explain. (6 points) With 200=I , the vertical intercept of the budget line would be equal to 1020200==apI. This establishes that 200=HI , indicating that the budget line further from the origin in the graph above is the relevant budget line when 200=I . From here, note that by the shape of the Income Consumption Curve, a slight increase in income above 200=I would result in decreased consumption of alcohol. This indicates that alcohol is an inferior good at this level of income, implying that the income elasticity of demand would be negative. Extra Credit! Consider a consumer with utility given by {}{}4321,min,min)( xxxxXU+=. Suppose: each unit of good one costs 41=p ; each unit of good two costs 62=p ; each unit of good three costs 23=p ; and each unit of good four costs 104=p . If this consumer wants to realize “5 units of happiness” (that is, 5)(=XU ) as inexpensively as possible, how much money would she