Econ501-midterm-solution - Dr Huanxing Yang Econ 501...

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Dr. Huanxing Yang Econ 501 Midterm Exam Tuesday, Feb. 5 th 2008 1. True or false questions. Briefly justify your answer. (5 points each) a) The price elasticity of the demand for refrigerator is greater in long-run than in short-run. False. For a durable good like refrigerator, the short run elasticity is greater. b) A Giffen good must be an inferior good. True. A Giffen good is a very inferior good such that the income effect dominates the substitution effect. c) The following two utility functions represent the same preference: U(x,y)=x 2 y, U(x,y)=2logx + logy. True. Preference is essentially ordinal. The second utility function is the log of the first one. d) The utility function U(x,y)=x 2 y exhibits diminishing marginal rate of substitution of x for y. True. MRS=2xy/(x 2 )=2y/x, which is decreasing in x. e) For utility function U(x,y)=x 1/2 +y, the income effect of a change in price x is zero. True. This is a feature of quasilinear utility functions. 2. Consider a consumer and two goods: x, y. The consumer’s utility function is given by U(x,y) = 5x 1/2 y 1/3 . The price of good x is p x =$6 and the price of good y is p y =$3. The consumer has $20 of income. a)
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This note was uploaded on 07/17/2008 for the course ECON 501.02 taught by Professor Yang during the Winter '08 term at Ohio State.

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Econ501-midterm-solution - Dr Huanxing Yang Econ 501...

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