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105midterm1_sp062

105midterm1_sp062 - Economics 105 Midterm 1 Name Discussion...

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Economics 105 Midterm 1 March 23, 2006 Name: Discussion Section: You have seventy-five minutes to complete the quiz. Be sure to get to all five questions. Explanations are required for all answers. 1. (14 pts) 2. (15 pts) 3. (12 pts) 4. (18 pts) 5. (16 pts) 1

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1. Lucy enjoys consuming tea ( x ) and cookies ( y ). Her expenditure function is given by: e = p x U + p y U a) Derive Lucy’s Marshallian demands (4 pts) b) Derive Lucy’s Hicksian demands (4 pts) c) Derive Lucy’s indirect utility function (4 pts) d) Fill in the blank! “Indirect utility functions are homogeneous of degree in .” (2 pts) 2
2. Peter and Susan are the only two people in the whole wide world. Both Peter and Susan like consuming adventures ( x ) and presents ( y ). Peter is endowed with x P = 10 and y P = 40 while Susan is endowed with x S = 20 and y S = 20. a) Draw the Edgeworth box associated with their endowments. Graph some ‘normal’ looking indifference curves through the endowment point and show where trades could be made such that both Peter and Susan are better off. (3 pts)

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