Econ501aMidansW07

# Econ501aMidansW07 - The Ohio State University Department of...

This preview shows pages 1–2. Sign up to view the full content.

Department of Economics Econ 501.02 Winter 2007 Prof. James Peck Midterm Questions and Answers Part I: Short Answer. 1. (10 points) True or False, and explain. If a consumer’s preferences for goods x and y can be represented by the utility function, u ( x, y )= xy ,then the preferences can also be represented by the utility function, u ( x, y )=10 xy . Answer: There are many ways to see that the answer is True. The coe - cient of 10 does not a f ect the underlying preferences, because the indi f erence curves are the same, only the labelling is di f erent. For example, the indi f er- ence curve corresponding to utility of 2 with the f rst utility function is the indi f erence curve corresponding to utility of 20 with the second utility func- tion. Another way to see that the preferences are the same is to notice that the marginal rate of substitution at any point ( x, y ) is y/x with either utility function. Finally, whenever ( x A ,y A ) is preferred to ( x B ,y B ) with the f rst utility func- tion, so x A y A >x B y B holds, then ( x A ,y A ) is preferred to ( x B ,y B ) with the second utility function, because 10 x A y A > 10 x B y B holds, and vice versa. 2. (10 points) True or False, and explain. If the price elasticity of demand for Honda Accords in the eastern half of the U.S. is 2 ,andifthepr ice elasticity of demand for Honda Accords in the western half of the U.S. is also 2 , then the price elasticity of demand for the entire U.S. market must be 2 . Answer: The answer I had in mind was True. Intuitively, if a 1% increase in price causes demand to fall by 2% in the East and 2% in the West, then overall demand must fall by exactly 2%. To show this formally, we know dX E dp x p x X E = 2= dX W dp x p x X W , so we can write dX E dp x = 2 X E p x (1) dX W dp x = 2 X W p x .

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

## This note was uploaded on 07/17/2008 for the course ECON 501.02 taught by Professor Yang during the Spring '08 term at Ohio State.

### Page1 / 6

Econ501aMidansW07 - The Ohio State University Department of...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online