PASS ECON 2300
Worksheet 6
MULTIPLE CHOICE QUESTIONS
1. Mary has homothetic preferences. When her income was $1,000, she bought 40 books and 60
newspapers. When her income increased to $1,500 and prices did not change, she bought
a. 60 books and 90 newspapers.
b. 80 books and 120 newspapers.
c. 60 books and 60 newspapers.
d. 40 books and 120 newspapers.
e. There is not enough information for us to determine what she would buy.
2. Madonna buys only two goods. Her utility function is Cobb-Douglas. Her demand functions have
which of the following properties?
a. Her demand for one of the two goods does not depend on income.
b. Her demand for neither good depends on income.
c. Her demand for each of the goods depends on income and on the prices of both goods.
d. Her demand for each of the two goods depends only on her income and on the price of that
good itself.
e. One of the goods is an inferior good and the other is a normal good.
3. Natalie consumes only apples and tomatoes. Her utility function is U(x, y) = x2y8, where x is the
number of apples consumed and y is the number of tomatoes consumed. Natalie’s income is $320,
and the prices of apples and tomatoes are $4 and $3, respectively. How many apples will she
consume?
a. 21.33
b. 16
c. 8
d. 48
4. Walt consumes strawberries and cream but only in the fixed ratio of three boxes of strawberries to
two cartons of cream. At any other ratio, the excess goods are totally useless to him. The cost of a
box of strawberries is $10 and the cost of a carton of cream is $10. Walt’s income is $200.
a. Walt demands 10 cartons of cream.
b. Walt demands 10 boxes of strawberries.
c. Walt considers strawberries and cartons of cream to be perfect substitutes.
d. Walt demands 12 boxes of strawberries.
5. Harry has $10 to spend on cans of Coke and Pepsi, which he regards as perfect substitutes, one for one. Pepsi
costs $0.50 a can and Coke costs $0.60 a can. Harry has 20 coupons, each of which can be used to buy 1
can of Coke for $0.40. Which of the following bundles will Harry buy?
a. 20 cans of Pepsi and no Coke
b. 6 cans of Coke and no Pepsi
c. 10 cans of Coke and 8 cans of Pepsi
d. 10 cans of Coke and 12 cans of Pepsi
e. None of the above.
6. Katie Kwasi’s utility function is U(x1, x2) = 2(ln x1) + x2. Given her current income and the current
relative prices, she consumes 10 units of x1 and 15 units of x2. If her income doubles, while prices stay
constant, how many units of x1 will she consume after the change in income?
a. 20
b. 18
c. 10
d. 5
e. There is not enough information to determine how many.
7. If Charlie’s utility function were X4AXB and if apples cost 30 cents each and bananas cost 10 cents each,
Charlie’s budget line would be tangent to one of his indifference curves whenever
a.
4XB = 3XA.
b.
XB = XA.
c.
XA = 4XB.
d.
XB = 4XA.
e.
30XA + 10XB = M.
8. Quincy lives on pretzels and seafood salads. The price of pretzels is 1 dollar per bag and the price of seafood
salads is 2 dollars each. Quincy allows himself to spend no more than 14 dollars a day on food. He also
restricts his consumption to 3,400 calories per day. There are 600 calories in a bag of pretzels and 200
calories in a seafood salad. If he spends his entire money budget each day and consumes no more calories
than his calorie limit, he can consume up to
a.
b.
c.
d.
e.
2 bags of pretzels per day but no more.
5 seafood salads per day but no more.
4 bags of pretzels per day but no more.
5 bags of pretzels per day but no more.
None of the above.
9. Georgina thrives on two goods: pears and bananas. The cost of pears is 30 pesos each and the cost of bananas
is 15 pesos each. If her income is 180 pesos, how many pears can she buy if she spends all of her income
on pears?
a.
9
b.
12
c.
4
d.
6
10. Preferences are said to be monotonic if
a.
all goods must be consumed in fixed proportions
b.
c.
all goods are perfect substitutes.
more is always preferred to less.
d.
there is a diminishing marginal rate of substitution.
11.Edmund must pay $6 each for punk rock video cassettes, V. If Edmund is paid $24 per sack for
accepting garbage, G, and if his relatives send him an allowance of $48, then his budget line is
described by the equation
a.
6V = 24G.
b.
6V + 24G = 48.
c.
6V – 24G = 48.
d.
6V = 48 – G.
e.
None of the above
12. Angela has preferences represented by the utility function U(x, y) = 2x + 2y. She consumes 10 units
of good x and 6 units of good y. If her consumption of good x is lowered to 4, how many units of y must
she have in order to be exactly as well off as before?
a.
14
b.
13
c.
12
d.
15
13. Charlie’s utility function is U(A, B) = AB, where A and B are the numbers of apples and bananas,
respectively, that he consumes. When Charlie is consuming 20 apples and 80 bananas, if we put apples on
the horizontal axis and bananas on the vertical axis, the slope of his indifference curve at his current
consumption is
a.
-8
b.
-9
c.
-20
d.
-4
e.
none of the above
14. The prices of goods x and y are each $1. Jane has $20 to spend and is considering choosing 10 units of
x and 10 units of y. Jane has nice convex preferences and more of each good is better for her. Where x is
drawn on the horizontal axis and y is drawn on the vertical axis, the slope of her indifference curve at the
bundle (10, 10) is –2.
a.
The bundle (10, 10) is the best she can afford.
b.
She would be better off consuming more of good x and less of good y
c.
d.
e.
She would be better off consuming more of good y and less of good x.
She must dislike one of the goods.
both c and d
15. Which of the following could possibly change a rational consumer’s demand?
a.
Changing his utility function by cubing it
b.
c.
d.
e.
Changing his utility function by multiplying it by 3 and subtracting 100 from it
Increasing all prices and his income by $3
Multiplying all prices and income by 2.2
More than one of the above
TRUE/ FALSE
1. Consumers always spend a constant fraction of their income on each good.
2. If goods are perfect complements, income and price offer curves are both lines through the
origin.
3. Goods can never be inferior for Cobb-Douglas preference or perfect complements.
4. Demand for perfect substitutes is downward sloping.
SHORT ANSWER QUESTION
1. Briefly explain in a sentence or two how you could tell
a. whether a good is a normal good or an inferior good.
b. whether two goods are complements or substitutes.
c. whether a good is a giffen good or not