Principles of Macroeconomics

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Review Questions for Midterm 2 Econ 101, Lecture 4, Spring 2007 Professor Korinna K. Hansen TAs: Jonathan Thornhill, Kyoung Jin Choi, Woo Jin Choi and Jim Lin 1) In a world of two goods X and Y with prices P X and P Y , an increase in both prices P X and P Y will cause an _______________ in consumer’s budget line. a) inward shift b) outward shift c) ambiguous (inward or outward) shift d) none of the above Use the following information to answer the next two questions: The graph below shows Fred’s indifference curves and budget line for goods X and Y. Y A C B D X 2) The following is true for consumption combinations A and B for Fred: 3) The following is true for consumption combinations A, B, C and D for Fred: 4. If Betty’s marginal rate of substitution between bus rides and taxi rides is -8, MU t /MU b = -8, and the price for a bus ticket is $2 but the price for a taxi ride is $20, then Betty (at her current
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position along her budget line) must be consuming: Use the following information to answer the next two questions: Michael has $100 to spend on DVDs and books. DVDs cost $20 per unit and books $25 per unit and Michael has the following utility function for these two goods: # of Total # of Total DVDs Utility Books Utility 1 50 1 40 2 90 2 70 3 120 3 90 4 135 4 105 5 145 5 115 6 150 6 120 7 153 7 122 5) Therefore Michael is experiencing: a) increasing marginal utility for both goods b) decreasing marginal utility for both goods c) increasing marginal utility for books but decreasing for DVDs d) decreasing marginal utility for books but increasing for DVDs 6) Given all the information given above Michael will choose to consume: 7) John receives the following levels of total utility after consuming one, two, three, four, five and six ice-ream cones at the Union in a day: 10, 18, 25, 31 and 35, and 36. Therefore, John’s preferences are consistent with the law of:
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