Prelim 1 - College of Human Ecology Cornell University...

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Unformatted text preview: College of Human Ecology Cornell University Ithaca, New York Department of Policy Analysis and Management PAM 200 Intermediate Micro A. Sinan ¨ Un¨ur – Spring 2008 Prelim 1 – Answers February 26, 2008 Multiple Choice MC 1) You buy a house for $1,000,000. Compared to the situation before the transaction took place: ( a ) you are worse off. ( b ) the seller is worse off. ( c ) both the seller 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 . If any party were made worse off by the transaction, then the transaction would not have taken place. MC 2) Turkish Airlines charge students a discounted ticket price for flights to Istanbul from New York City. Sam is a student who buys discounted tickets. Adam is not a student and pays full price. They both take the same number of flights to Istanbul every year. Then: ( a ) Sam values the last flight she took more than Adam values the last flight he took. ( b ) They both place the same value on flights. ( c ) Either Sam or Adam is making the wrong decision. ( d ) Adam values the last flight he took more than Sam values the last flight she took. Answer : 2d . Both Adam and Sam choose the number of flights they take by equating the value they place on flights with the opportunity cost of flights. For both of them, the opportunity cost of the last flight they took must be equal to the value they placed on that flight. Since Adam’s opportunity cost is higher, he must value that flight more than Sam does hers. MC 3) Suppose Alice considers coffee and muffins to be perfect complements . Her utility function is given by U ( M , C ) = min { M , C 8 } , where M is the number of muffins and C is the ounces of coffee she consumes. If the price of coffee is P C = $0 . 25 per ounce and price of muffins is P M = $2 per muffin, then ( a ) She will spend half of her breakfast budget on coffee and half on muffins. ( b ) She will buy eight muffins for every ounce of coffee she buys. ( c ) She will not purchase any muffins. ( d ) She will not purchase any coffee. Answer : 3a . Alice’s choice of coffee and muffin’s will satisfy C = 8 M . Substituting in the budget equation, we have: . 25 ( 8 M )+ 2 M = 2 M + 2 M = I . From this, we can easily see that she will spend half of her budget on coffee and the other half on muffins. 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, 44) Bundle M: (18,0) Bundle N: (0, 34) Which one of these bundles will he choose?...
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This note was uploaded on 05/12/2008 for the course PAM 2000 taught by Professor Evans,t. during the Spring '07 term at Cornell.

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Prelim 1 - College of Human Ecology Cornell University...

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