ECON 310 – Spring 2007 (ticket #15615) Name: __A. Key_______________ Exam 1 - Version C Multiple Choice: (4 points each) 1) Bill’s utility is given by the function 21)( xxXU=. It follows that his preferences over the three consumption bundles )3,5(=A , )1,4(=B , and )4,3(=C could be summarized as: d. ACB pp 2) Denise has income of 90=I and faces prices of 41=p and 52=p . The consumption bundle )4,15(),(21=xx c. is affordable, and costs an amount less than her income. 3) Generally, in order to maximize utility a consumer must b. purchase an affordable bundle which gives a higher level of utility than any other affordable bundle. 4) Which of the following is NOT one of the “Three Key Analytical Tools” upon which nearly all microeconomic models rely? b. Indirect Utility. 5) Consider a market in which Demand is given by the linear function ppD 100000,2)( −= . If price were to decrease from 12=p to 10=p , the value of Consumers’ Surplus would increase by c. 1,800. 6) The price of apples decreases from $0.78 per pound to $0.69 per pound. ___________ provides a “measure of how much money a consumer would be willing to give up after this price decrease in order to be exactly as well off as she was before the price decrease (with her actual income).” d. Compensating Variation (in income). 7) An Exogenous Variable b. is one whose value is taken as given when analyzing an economic system. 8) Consider the market for peanuts. Suppose supply were to decrease with no change in demand. This change would result in b. an increase in equilibrium price but a decrease in equilibrium quantity. 9) An “Indifference Curve” e. More than one, but not all, of the above answers is correct. 10) Normative Analysis e. All of the above answers are correct.11) By definition, good one is a Giffen good if a. an increase in 1p leads to increased consumption of good one. 12) Microeconomics b. examines the behavior of all types of individual decision makers, including consumers, households, managers, and firms. 13) As the price of DVDs decreases from $17.99 to $14.99, Scott’s Compensating Variation (in income) is 12.22$=CV and his Equivalent Variation (in income) is 19.25$=EV. From this information alone, we can infer that b. DVDs are a normal good for Scott. 14) Which of the following is an example of “Equilibrium Analysis”? a. Using the model of Supply and Demand to determine the quantity of trade and price at which trade will take place in the market for corn. 15) The ______________ directly illustrates the set of utility maximizing consumption bundles as income is varied (holding prices constant). a. Income Consumption Curve 16) The critically acclaimed movie “Borat – Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan” was released on DVD on March 6, 2007. Demand for this DVD in the San Fernando Valley could be summarized by the linear inverse demand function qqPD200150)( −= . In this market demand is d. elastic only at prices above $25. For questions 17 through 19, consider a consumer with utility of 2144)( xxXU += . For this consumer, 112xMU = and 222xMU = . Each unit of good one costs 31=p ; each units of good two costs 52=p. The income of the consumer is equal to I (where 0>I is an unspecified value). 17) The preferences of this consumer a. are “monotonic,” since each marginal utility is always positive. 18) If the consumer can afford the bundle )5,10(=A but cannot afford the bundle )10,5(=B it follows that a. he can also afford the bundle )6,8(=C . 19) With income of 240=I, the bundle ())24,40(,21=xx c. does not maximize utility, since 5353402421≠==MUMU.For questions 20 through 22, consider a consumer with preferences as illustrated by the indifference curves below. The budget line of this consumer is also illustrated. 20) This consumer considers the bundle )10,18(),(21=xx to be d. less desirable than the bundle )10,38(),(21=xx . 21) If this consumer were to purchase 102=x units of good two, how many units of good one could she purchase when spending all of her income? b. 281=x. 22) In order to maximize utility, this consumer should purchase the bundle e. )15,18(=X . “Short Answer” Question: 1. The table below summarizes values of Price, Cross-Price, and Income Elasticities of Demand for “Product X” and “Product Y” under current market conditions. Based upon these values, answer the following (making reference to the relevant values in the table). Elasticity: Product X: Product Y: Price Elasticity of Demand -0.74 -1.17 Cross-Price Elasticity of Demand -0.32 -0.45 Income Elasticity of Demand 0.39 -0.27 a. Under current market conditions, is demand for “Product X” elastic, unit elastic, or inelastic? Explain. (3 points) Inelastic, since the value of “Price Elasticity of Demand for Product X” (-0.74) is greater than -1. 2x 1x 0 0 48 24 40=u 5 10 15 18 38 120=u 80=ub. Would a slight increase in the price of “Product Y” result in an increase, decrease, or no change in Total Consumer Expenditures on “Product Y”? Explain. (3 points) Since demand fro Product Y is elastic (the value of “Price Elasticity of Demand for Product Y” (-1.17) is less than -1), a slight increase in the price of “Product Y” would result in a decrease in Total Consumer Expenditures on “Product Y.” c. Would an increase in consumer income lead to an increase or decrease in demand for “Product X”? Explain. (3 points) Since the value of “Income Elasticity of Demand for Product X” (0.39) is positive, it follows that “Product X” is a normal good. Therefore, an increase in consumer income would lead to an increase in demand for “Product X.” d. Would the values reported above appear to be “valid” if you were told that “Product X” is Pepsi Cola and “Product Y” is Sam’s Choice Cola (Walmart’s “generic” cola)? Explain. (3 points) Not valid. We would expect “Pepsi Cola” and “Sam’s Choice Cola” to be substitutes for each other. However, from the negative “Cross-Price Elasticities of Demand” reported above (-0.32 and -0.45) we know that “Product X” and “Product Y” are complements to each other. Extra Credit! Consider a consumer with utility of 2221)( xxXU += . From here it follows that 112xMU= and 222xMU