Exam 1_Solutions

Exam 1_Solutions - College of Human Ecology Cornell...

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College of Human Ecology Cornell University Ithaca, New York Department of Policy Analysis and Management PAM 200 Intermediate Micro A. Sinan ¨ Un¨ur – Fall 2007 Prelim 1 – Answers October 2, 2007 Multiple Choice MC 1) You sell your house for $1,000,000. Compared to the situation before the transaction took place: ( a ) you are worse off. ( b ) the buyer is worse off. ( c ) both the buyer and you are worse off because you both paid the real estate agent a 3% commission. ( d ) everyone involved in the transaction is better off. Answer : 1d . In a market economy, the fact that they each took part in the transaction (when they had the option not to) ‘reveals’ that all parties were made better off by the transaction. MC 2) Shortline charges students a discounted ticket price for bus trips to New York. Sam is a student who buys discounted tickets. Adam is not a student and pays full price. They both take the same number of trips to New York City every year. Then: ( a ) Sam values the last bus trip she took more than Adam values the last trip he took. ( b ) Adam values the last trip he took more than Sam values the last trip she took. ( c ) They both place the same value on bus trips. ( d ) Either Sam or Adam is making the wrong decision. Answer : 2b . Denote bus rides by x and all other goods by y . The question states that the price Adam pays for bus rides, P A x is greater than the price Sam pays, P S x . The number of bus rides chosen by each person must maximize that person’s utility. That is, we have MRS A x , y = P A x P y > P S x P y = MRS S x , y .
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MC 3) Suppose Alice considers cream cheese and bagels to be perfect complements . Her utility function is given by U ( B , C ) = min { 2 B , C } , where B is the number of bagels and C is the packets of cream cheese she consumes. If the price of cream cheese is P C = $1 per packet oz cream cheese and price of bagels is P B = $3 per pagel, then ( a ) She will not purchase any bagels. ( b ) She will not purchase any cream cheese. ( c ) She will spend one third of her budget on bagels and two-thirds on cream cheese. ( d ) She will buy two packets of cream cheese for every bagel she buys. Answer : 3d . Her utility function indicates that, regardless of her budget set, her choices must satisfy C = 2 B . MC 4) Bob considers coffee and tea to be perfect substitutes and likes coffee twice as much as tea. His utility function is given by U ( C , T ) = 2 C + T where C and T denote his daily coffee and tea consumption in fl oz, respectively. Suppose only the following bundles are available to Bob: Bundle K: (15,15) Bundle L: (1, 30) Bundle M: (18,0) Bundle N: (0, 34) Which one of these bundles will he choose? ( a ) Bundle K ( b ) Bundle L ( c ) Bundle M ( d ) Bundle N Answer : 4a . U ( 15 , 15 ) = 45 , U ( 1 , 30 ) = 32 , U ( 18 , 0 ) = 36 and U ( 0 , 34 ) = 34 . The following graph shows a consumer who considers food and shelter to be perfect com- plements. One of his indifference curves and the budget line he faces are depicted in the figure. Use the graph to answer questions 5 7 .
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Exam 1_Solutions - College of Human Ecology Cornell...

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