PS 1 Answers - MICROECONOMICS 100A FALL 2009 PROBLEM SET 1...

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MICROECONOMICS 100A FALL 2009 - PROBLEM SET 1 Tuesday,September15,2009,11:00am(inlecture) TRUEor FALSEandEXPLAIN:For eachstatementbelow, decidewhetheritistrue of false, and explain the reasoning behind your answers in a few sentences. When appropriate,provideadiagram. 1. Today’s auto market and tomorrow’s auto market can be seen as one market. TRUE . Most people can wait for a day to buy a car if price is going to fall. 2. Consider the utility function U ( x , y ) = 2 x + y . The marginal utilities of x and y are both diminishing and the MRS is also diminishing. FALSE . MU x = 1 x and this falls as x increases. However, MU y = 1 and is constant when y increases. MU y is not diminishing. The MRS is 1/ x so this is diminishing as the consumer substitutes x for y . (FYI: This type of utility functions is called quasi- linear: U ( x , y ) = g ( x ) + by , where b is a positive constant and g ( x ) is increasing in x . The utility function is linear in y , but generally not linear in x . Since the MRS depends on x but not y , the indifference curves have the same slope at any given x and are parallel.) 3. As one moves upward along a downward-sloping linear demand curve, demand be- comes more elastic. TRUE . Using the formula of elasticity, the slope remains constant while price in- creases and quantity decreases.
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