Practice1

# Practice1 - University of Wisconsin Economics 301:...

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Economics 301: Intermediate Microeconomic Theory Korinna K. Hansen Practice Problems (Part 1) 1). Use graphs where necessary and EXPLAIN whether the following statements are true or false: a). If all prices are doubled and money income is left the same, the budget constraint does not change because relative prices do not change. b). There are two goods. You know how much of good 1 a consumer can afford if she spends all of her income on good 1. If you knew the ratio of the prices of the two goods, then you could draw the consumer’s budget line without any more information. c). Suppose there are two goods, the prices of both goods are positive, and a consumer’s income is also positive. If the consumer’s income doubles and the price of both goods triple, the slope of the consumer’s budget line does not change but the budget line shifts inward toward the origin. d). If someone has the utility function U= 1,000 + 2 min (x, y) then x and y are perfect complement goods for that person. e). With quasilinear preferences, the slope of indifference curves is constant along all rays through the origin. f). Bruce’s utility function is U (x 1 , x 2 ) = x 1 x 2 . Therefore Bruce experiences diminishing marginal rate of substitution between goods 1 and 2. g). Alice’s utility function is U (x 1 , x 2 ) = x 1 2 x 2 . Steve’s utility function is U (x 1 , x 2 ) = x 1 2 x 2 +2x. Alice and Steve have the same preferences since Steve’s utility function is a monotonic transformation of Alice’s. h). A consumer has preferences represented by the utility function U(x 1 , x 2 ) =10(x 2 1 +2x 1 x 2 +x 2 2 ) – 50. For this consumer, good 1 and 2 are perfect substitutes. i). If one utility function is a monotonic transformation of another, then the former must assign a higher utility number to every bundle than the latter. j). If Anne is currently willing to trade 5 movie tickets for 1 basketball ticket, then she must like basketball better than movies. k). If consumers spend all their income, it is impossible for all goods to be inferior goods. l). If preferences are quasilinear, then for high incomes the income offer curve is a straight line parallel to one of the axes. m). Ivan spends his entire income on two goods.

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## This note was uploaded on 08/08/2008 for the course ECON 301 taught by Professor Hansen during the Spring '08 term at Wisconsin.

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Practice1 - University of Wisconsin Economics 301:...

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