BSc II – Section B
Microeconomics Winter 2009
Quiz 2 (B)
Lahore School of Economics
Microeconomics I
Winter Term 2009
Quiz 2: BSc. 2, Section B
The assumption that preferences are complete:
a. means that a consumer will spend her entire income.
b. is unnecessary, as long as transitivity is assumed.
c. recognizes that there may be pairs of market baskets that cannot be compared.
d. means that between any two market baskets of goods, the consumer can determine that
either one is preferred to the other or that she is indifferent between them.
Alvin's preferences for good X and good Y are shown in the diagram below.
Good Y
45°
A
Good X
Figure 3.2
Based on Figure 3.2, it can be inferred that:
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BSc II – Section B
a.
b.
c.
d.
e.
Microeconomics Winter 2009
Quiz 2 (B)
Alvin does not consider good X as "good."
Alvin will never purchase any of good Y.
Alvin regards good X and good Y as perfect substitutes.
Alvin regards good X and good Y as perfect complements.
none of the above.
Refer to Figure 3.2. At any consumption bundle with the quantity of good X exceeding the quantity
of good Y (that is, a bundle located below the 45 degree line, like point A), Alvin’s marginal rate of
substitution of good X for good Y is
a. diminishing.
b. positive.
c. constant and positive.
d. zero.
Refer to Figure 3.2. Which assumption concerning preferences do Alvin's indifference curves
violate? (Any of the BOLD options marked are considered correct)
a.
b.
c.
d.
e.
Diminishing marginal rates of substitution.
Transitivity of preferences.
More is preferred to less.
Completeness.
Both (a) and (c).
Which of the following is true about the indifference curve where one commodity (such as
pollution) is "bad"?
a.
b.
c.
d.
It has a negative slope.
It has a positive slope.
It is horizontal.
It is vertical.
Which of the following are examples of situations in which the standard model of the consumer may
not be realistic?
a.
b.
c.
d.
impulse purchases
following fads and fashions instead of one’s own preferences
complexity of making choices
all of the above
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BSc II – Section B
Microeconomics Winter 2009
Quiz 2 (B)
Use the following two statements to answer this question:
I.If utility is ordinal, a market basket that provides 30 utils provides twice the satisfaction of a market
basket that provides 15 utils.
II.When economists first studied utility it was believed that utility was cardinal, but it was later
discovered that ordinal preferences are sufficient to explain how most individual decisions are made.
a.
b.
c.
d.
Both I and II are true.
I is true, and II is false.
I is false, and II is true.
Both I and II are false.
Consider the following three market baskets:
A
B
C
Cheese
5
15
10
Crackers
8
6
7
If baskets A and B are on the same indifference curve and if indifference curves exhibit
diminishing MRS:
a.
b.
c.
d.
C is preferred to both A and B.
A and B are both preferred to C.
C is on the same indifference curve as A and B.
There is not enough information to determine preferences for C relative to the other goods.
Theodore's budget line has changed from A to B. Which of the following explains the change in
Theodore's budget line?
a.
The price of food and the price of clothing increased.
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BSc II – Section B
b.
c.
d.
e.
Microeconomics Winter 2009
Quiz 2 (B)
The price of food increased, and the price of clothing decreased.
The price of food decreased, and the price of clothing increased.
The price of food and the price of clothing decreased.
None of the above.
An individual consumes only two goods, X and Y. Which of the following expressions represents
the utility maximizing market basket?
a.
b.
c.
d.
e.
MRSxy is at a maximum.
Px/Py = money income.
MRSxy = money income.
MRSxy = Px/Py.
All of the above.
The price of lemonade is $0.50; the price of popcorn is $1.00. If Fred has maximized his utility by
purchasing lemonade and popcorn, his marginal rate of substitution will be:
a.
b.
c.
d.
2 lemonades for each popcorn.
1 lemonades for each popcorn.
1/2 lemonade for each popcorn.
indeterminate unless more information on Fred's marginal utilities is provided.
The principle of revealed preference would say that if Xavier chooses market basket A over market
basket B then:
a.
b.
c.
d.
if A is more expensive than B, then Xavier must prefer A over B.
if A is more expensive than B, then Xavier must prefer B over A.
if A is less expensive than B, then Xavier must prefer A over B.
if A is less expensive than B, then Xavier must prefer B over A.
Oscar consumes only two goods, X and Y. Assume that Oscar is not at a corner solution, but he is
maximizing utility. Which of the following is NOT necessarily true?
a.
b.
c.
d.
e.
MRSxy = Px/Py.
MUx/MUy = Px/Py.
Px/Py = money income.
Px/Py = slope of the indifference curve at the optimal choice.
MUx/Px = MUy/Py.
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BSc II – Section B
Microeconomics Winter 2009
Quiz 2 (B)
A team of researchers has conducted a study of the well being of the citizens of the island nation of
Zarasa. Using a scale from 1 (least happy) to 10 (most happy), the researchers find that citizens who
earn 100 Zarutas per year have a mean happiness of 2.0, those who earn 200 Zarutas per year have
a mean happiness of 6.0, and those who earn 300 Zarutas per year have a mean happiness of 7.0.
The researchers should make which of the following conclusions?
a.
b.
c.
d.
e.
The utility of Zarasians increases with income
The marginal utility of Zarasians increases with income
The marginal utility of Zarasians decreases with income
Both a. and b.
Both a. and c.
Which of the following is true regarding income along a price consumption curve?
a.
b.
c.
d.
Income is increasing.
Income is decreasing.
Income is constant.
The level of income depends on the level of utility.
If an Engel curve has a positive slope
a. both goods are normal.
b. the good on the horizontal axis is normal
c. as the price of the good on the horizontal axis increases, more of both goods in consumed.
d. as the price of the good on the vertical axis increases, more of the good on the horizontal axis is
consumed.
A Giffen good
a. is always the same as an inferior good.
b. is the special subset of inferior goods in which the substitution effect dominates the income
effect.
c. is the special subset of inferior goods in which the income effect dominates the
substitution effect.
d. must have a downward sloping demand curve.
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BSc II – Section B
Microeconomics Winter 2009
Quiz 2 (B)
Good A is an inferior good. If the price of good A were to suddenly double, the substitution effect
would cause the purchases of good A to increase by
a.
b.
c.
d.
e.
more than double.
exactly double.
less than double.
any of the above are possible.
none of the above.
Clothing
(units per
week)
C1
A
C
B
C2
Food
(units
per 4.2 as point A.
A consumer's original utility maximizing market basket of goods is shown
in Figure
C
3
week)
Following a price change, the consumer's utility maximizing market basket is at point B.
Figure 4.2
moderate 41. Refer to Figure 4.2. The substitution effect on the quantity of clothing purchased is:
a.
b.
c.
d.
e.
the change from C3 to C1.
the change from C3 to C2.
the change from C2 to C1.
the change from C1 to C2.
none of the above.
Refer to Figure 4.2. The income effect on the quantity of clothing purchased is:
a.
b.
c.
d.
e.
the change from C1 to C3
the change from C1 to C2.
the change from C2 to C3.
the change from C3 to C2.
none of the above.
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BSc II – Section B
Microeconomics Winter 2009
Quiz 2 (B)
Based Figure 4.2, clothing is:
a.
b.
c.
d.
a normal good.
an inferior good, but not a Giffen good.
a Giffen good.
none of the above.
A local retailer has decided to carry a well-known brand of shampoo. The marketing department
tells them that the quarterly demand by an average man is:
Qd = 3 - 0.25P
and the quarterly demand by an average woman is:
Qd = 4 - 0.5P
The market consists of 10,000 men and 10,000 women. How may bottles of shampoo can they
expect to sell if they charge $6 per bottle?
a.
b.
c.
d.
e.
20,000
33,000
25,000
10,000
none of the above.
The demand curve for tickets to the George Winston concert (with special guest star, Kenny G) is
given as follows:
Q = 200 - 0.1P
At a price of $30, what is the consumer surplus from concert tickets?
a.
b.
c.
d.
e.
$0.
$20.
$2,000.
$1,970.
$194,045.
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BSc II – Section B
Microeconomics Winter 2009
Quiz 2 (B)
Subjective
1. An individual consumes products X and Y and spends $25 per time period. The prices of the two
goods are $3 per unit for X and $2 per unit for Y. The consumer in this case has a utility function
expressed as:
U(X,Y) = .5XY
a.
b.
Express the budget equation mathematically. (2)
Determine the values of X and Y that will maximize utility in the consumption of X and Y.
(Hint: Use MU) (6)
c. Determine the total utility that will be generated per unit of time for this individual. (2)
a.
The budget line can be expressed as:
I = P XX + P YY
25 = 3X + 2Y
b.
In equilibrium, maximizing utility, the following relationship must hold:
MU X MU Y

PX
PY
In equilibrium
(0.5 Y)/3 = (0.5 X)/2
2Y = 3X, Y = (3/2)X
Thus the amount of Y to consume is 3/2 of the amount of X that is consumed. On the budget line
25 = 3X + 2(
3
X)
2
25 = 3X + 3X = 6X
X = 4.17 units per time period.
Y=
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3
(4.17) = 6.25 units per time period.
2
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BSc II – Section B
Microeconomics Winter 2009
Quiz 2 (B)
c.
The total utility is
U(x,y)
= 0.5(4.17)(6.25)
= 13.03 units of utility per time period.
2. At commodity bundle A, which consists of only apples and oranges, Annette's marginal utility per
dollar spent on apples is 10 and her marginal utility per dollar spent on oranges is 8. Diagram a
representative budget constraint and indifference curve that that passes through bundle A given
Annette's budget is exhausted at bundle A. Is Annette maximizing utility? Why or why not?
(5+1+4)
Annette should buy more apples and fewer oranges to increase her level of satisfaction.
Question 3
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BSc II – Section B
a.
Microeconomics Winter 2009
Quiz 2 (B)
Describe the Price elasticity of demand for “Food”. (2)
INELASTIC PED
b.
Also, sketch the Engel Curve for Food. Make sure you sketch either a steep or a flat curve
followed by appropriate reasoning. (4)
Relationship between income and quantity consumed. The Engel curve could be backward
bending or students may draw an inelastic upward sloping curve
c.
Given the rise in the price of Food, graph the income and substitution effects taking Good
X (a normal good) on the vertical axis. (5)
Considering Food A NORMAL GOOD: Both effects work in same direction backwards
(If food considered INFERIOR GOOD, Income effect works in opposite direction and DOES
NOT overpower the substitution effect)
d.
Which effect will be larger? (2)
For food as an inferior good, the income effect is smaller than substitution
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BSc II – Section B
Microeconomics Winter 2009
Quiz 2 (B)
For food as normal good, both effects are smaller since price rise or income rise does not increase
quantity demanded by huge amounts. Both are inealstic.
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