EC 308 1st EditionExam # 1 Study Guide 1. An increase in the price of one good will cause an outward shift of the budget curve. (True or False) False2. The law of demand states that when the price of a product falls, people buy more of it. (True of False) TRUE3. Shift in demand vs. change in quantity demandeda. Shift demand curve is anything except price b. Movement along demand curve is change in quantity demanded4. The equilibrium price is the price at which quantity supplied equals quantity demanded.(True of False) TRUE5. If the number of suppliers in the microcomputer industry increases, movement along the demand curve will occur. (True of False)TRUE6. An increase in income with no changes in the price of either good will cause an outward shift of the budget curve. (True of False) TRUE7. Briefly explain the Engle curve.a. Curve that plots relationship between quantity of x consumed and income8. Two special cases of Indifference curve. L-shaped and linear IC.a. L-shped curve- perfect complements such as left shoe and right shoeb. Linear- perfect substitutes9. Distinguish between the inferior good and Giffen Good.a. Giffen good has to be an inferior good but an inferior good does not have to be a giffen goodb. Giffen Good- quantity demanded rises as price rises10. Definition and computation of the price elasticity of demand.a. Change in Q/ Change in P * P/Q11. Property of consumer’s preferences: transitivity, completeness, convexity, more is better.12. Constrained maximization problem, for example, maximize utility subject to budget constraint.13. Definition of PCC and ICC.a.14. Horizontal summation: from individual demand to market demand.a. Two individuals, Qu=Q1+Q215. Income effect and substitution effect.a. Inferior- substitution and income move in opposite directionsb. Giffen good- substitutation and income, income effect dominates thesubstitution goodc. Normal good- substitution and income are the same16. Expected value of payoff of gamble.a. 50/50 chance either 30 or 60 EV=sum of PiVi= 0.5(60)+(0.5)-3017. Permanent income hypothesis.18. The relationship between the shapes of utility function and risk preferences.a. Concave- risk adverseb. Convex- risk sinkingc. Linear- risk neutral1. Let demand be given by P = 20 - 2Q and supply by P = 5 + 3Q. What will Equilibrium price and quantity?a. Set them equal to each other P=14. Q=32. If the consumer's budget constraint is given by 20F + 4S = 160 where F is food and S is shelter, how much food can he buy if he purchases 4 units of shelter? a. 20F+4S=160 S=4 plug it in and F=7.23. Professors Adams and Brown make up the entire demand side of the marketfor summer research assistants in the economics department. If Adam’sdemand curve is P=50-2QA and Brown’s is P=50-QB, whereQA∧QB are the hours demanded by Adams and Brown respectively,what is the market demand for research hours in the economics department?a. 25-1/2p+50-p== 75-3/2p4. Suppose that at a price of $400, 300 tickets are demanded to fly from NY toLA, California. Now the price rises to $600, and 280 tickets are demanded.Assuming the demand for tickets is linear, find the price elasticity at thequantity-price pairs (300,400) and (280,600)a. Find the slope, which would be -10b. 1/10 * 400/300c. 1/10 * 600/280marginal utility- rate at which total utility changes as quantity of food and shelterchangesmarginal rate of substitution- rate consumers willing to exchange good measuredalong vertical axis for good measured along horizontal axisindifference curves are downward sloping, DON’T CROSS, less steep as we movedown and to the right along curvebudget constraint- slope is negative of the price ratio of the two goodsbudget shifts due to price/income changeprice of 1 good changes the slope of the budget constraint changes 2 goods change by same proportion the budget constraint shifts parallel to theoriginalif income changes the budget constraint shifts