Midterm08Answerkey(posted)

Midterm08Answerkey(posted) - ECON191 ANSWER KEY FOR MIDTERM...

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1 ECON191 ANSWER KEY FOR MIDTERM Part I. Multiple Choices (30 points) 1. E 2. C 3. B 4. E 5. C 6. A 7. A 8. A 9. C 10. D Part II. Problem Solving Questions 11. (20 points) a) Optimal condition: 1 1 x xx yy y M Up p y M x p + =⇒ = b) Demand function for x : xy p xp ym += () 11 x y p p x m p ⎡⎤ +− = ⎢⎥ ⎣⎦ Therefore, 2 x y x mp p x p ++ = Demand function for y : px py m y x p p yp y m p +++ = Therefore, 2 x y y y p −− = Or, you could use the optimal condition derived in Part a: x y p yx p =− to derive the demand function. The answer will be same as above. c) The price elasticity of demand for x is:
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2 ( ) 2 2 step 2 step 1 2 1 2 y y xx x xy y x mp xp p mp p m p p p ζ −+ + ΔΔ == = < ++ ±²²³²²´ ±²²²²³²²²²´ The price elasticity of demand for y is: ( ) 2 2 step 2 step 1 2 1 2 x yy x y yx y y yp p p −− = > Hence, the demand for x is inelastic whereas the demand for y is elastic. d) Good x is a “gross substitute” of good y because the demand for x drops when y p goes down. Good y is a “gross complement” of good x because the demand for y rises when x p goes down. e) Both x and y are normal goods because the demand for x and y decreases when their own prices ( x p for x and y p for y ) increases. Furthermore, both x and y are superior goods because the demand for x and y increases when m increases. 12. (20 points) (a) False. In both restaurants, he has a budget of $100. Point A denotes his consumption bundle in restaurant A, and point B denotes his consumption bundle in restaurant B.
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Midterm08Answerkey(posted) - ECON191 ANSWER KEY FOR MIDTERM...

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