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practice4

# practice4 - co/ee with 2 oz of half-and-half(a Draw...

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Practice Problems for Midterm University of California, Los Angeles 1. A consumer spends his entire budget on two goods: x and y . (a) True or false: an increase in the price of x will always lead the con- sumer to purchase less x . (b) True or false: and increase in the price of x will always lead the consumer to purchase more y . 2. Graphically explain the e/ect in the budget constraint of an increase in an individual±s income without a change in relative prices. Explain the impact on the quantity demanded of both goods. 3. Explain the monotonicity and convexity axioms and their implications for the shape of the indi/erence curves. 4. Suppose that the consumer±s demand function for x is given x ( p x ;p y ;M ) = M p x + 2 p y Suppose one unit of x costs twice as much as one unit of y . What is the income elasticity of demand? What is the own-price elasticity of demand? What is the cross-price elasticity of demand? 5. Carol only likes co/ee with half-and-half. She always drinks a cup of

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Unformatted text preview: co/ee with 2 oz. of half-and-half. (a) Draw Carol±s indi/erence curves for co/ee and half-and-half. (b) Find Carol±s demand for co/ee and half-and-half. (c) How much co/ee and half-and-half will Carol purchase if she has \$30 of income, the price of a cup of co/ee is \$6 and the price of half-and-half is \$2? (d) Suppose that the price of co/ee rises to \$11. How will her consump-tion change? (e) How much should Carol±s income be to compensate for the increase in the price of co/ee? 6. David has the following preferences over the consumption of x and y : U ( x;y ) = ln x + 2 ln y . (a) Find David±s uncompensated demand for x and y and use these to ²nd his indirect utility function. 1 (b) Use the own-price Slutsky equation for x to determine the substitu-tion e/ect. (c) Find the compensated demand for x and y and use these to &nd the expenditure function E ( p x ;p y ;U ) . 2...
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practice4 - co/ee with 2 oz of half-and-half(a Draw...

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