Econ501aMidansS06

Econ501aMidansS06 - The Ohio State University Department of...

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The Ohio State University Department of Economics Econ 501.02 Spring 2006 Prof. James Peck Midterm Questions and Answers Part I: Short Answer. 1. (10 points) Suppose a focus group leader working for Coca Cola asks a consumer to rank her utility from consuming various "bundles" of coke and cheeseburgers, on a scale from 1 to 100. Which of the following statements will be more useful to the sellers of coke? Explain in terms of cardinal vs. ordinal utility. (a) Starting at (12 ounces of coke, 8 ounce cheeseburger), an additional ounce of coke increases her ranking from 50 to 55. (b) The ranking of (12 ounces of coke, 8 ounce cheeseburger) is the same as the ranking of (10 ounces of coke, 12 ounce cheeseburger). Answer: Statement (b) will be more useful. Statement (a) does not have any meaning because the cardinal properties of the utility function do not a f ect any economic choices. What matters is whether one bundle is preferred to another, not by how much, and we already know that more is preferred to less. Statement (b) tells us something about how this consumer values coke relative to a cheeseburger, by giving us two points on the same indi f erence curve. This consumer is willing to trade 2 ounces of coke for 4 ounces of cheeseburger, which might give coke a little bit of information about how much it can charge for its product. 2. (10 points) True or False, and explain. The income e f ect always operates in the opposite direction as the substitution e f ect. Answer:
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Econ501aMidansS06 - The Ohio State University Department of...

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