Answers to practice exam

Answers to practice exam - SECTION A: Short Answers 1....

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SECTION A: Short Answers 1. False. Diminishing MU is not required for DMRS. The condition for DMRS is: f 2 2 f 11 – 2f 1 f 2 f 12 + f 1 2 f 22 < 0, which may be true even if f 11, f 22 > 0, ie MUs were increasing. 2. True. Since raising the function to the power 1/(α + β) is a monotonic transformation that makes the exponents add up to 1. 3. True. MRS = f x / f y = y/x and is independent of proportional change in x and y. 4. False. Expenditure functions are rising and concave in prices. 5. False. The exception is the case of corner solution. 6. True. Elasticity of substitution = d ln(y/x)/d ln(f x / f y). Since (f x / f y) = (y/x) .5 , d ln(f x / f y) = .5 d ln(y/x). Thus the elasticity of substitution is 2. 7. True. In this case the foc for constrained utility maximization leads to f x / f y = y = P x / P y . Therefore, the demand fn for y is given by y * = P x / P y, which is independent of income. Thus, the income effect on the demand for y is zero. 8. True. Since the good is normal, income and substitution effect both reduces (increases) demand when own price increases (decreases). 9. True. From the budget constraint it is easily shown that the weighted income elasticities of all goods must sum to one. 10. True. Along an indifference curve , demand for y must go down(up) when price of x goes down(up). Therefore, goods must be net substitutes. 11. True. VNM utility index needs an arbitrary origin and scale, therefore does not
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Answers to practice exam - SECTION A: Short Answers 1....

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