I. TRUE OR FALSE (You do not need to give a justification but given
what you saw on the midterms I urge you to work one out).
1. Consumer’s surplus is another name for excess demand.
2. There is a positive consumer’s surplus when the total amount the
consumer pays for something is less than the amount she would be
willing to pay rather than do without it altogether.
3. If there is a price increase for a good that Susan consumes, her
compensating variation is the change in her income that allows her to
purchase her new optimal bundle at the original prices.
4. In general, aggregate demand depends only on prices and total income
and not on income distribution.
5. If consumer 1 has the demand function
x
1
= 1,000 - 2
p
and consumer 2
has the demand function
x
2
= 500 -
p
, then the aggregate demand function
for an economy with just these two consumers would be
x
= 1,500 - 3
p
for
p
< 500.
6. If the demand curve is a linear function of price, then the price
elasticity of demand is the same at all prices.
7. The demand curve is inelastic for inferior goods and elastic for
normal goods.
8. If consumer 1 has the inverse demand function given by
p
= 15 -
x
and consumer 2 has the inverse demand function given by
p
= 20 - 3
x
,
then the total quantity demanded by the two consumers is
x
= 7 when the
price
p
, is 11.
9. In general equilibrium analysis, an allocation is a feasible
allocation if every consumer is consuming a bundle that costs no more
than his or her income.
10. From Walras’s law it follows that in a market with two goods, if
demand equals supply in one market, then demand must equal supply in
the other market.
11. The second welfare theorem of economics states that if preferences
are convex, then any Pareto optimal allocation could be achieved as a
competitive equilibrium after some reallocation of initial endowments.
12. Jack Spratt’s utility function is
U
(
F
,
L
) =
L
. His wife’s utility
function is
U
(
F
,
L
) =
F
. If Jack’s initial endowment is 40 units of
F
and 20 units of
L
and if Jack’s wife’s initial endowment is 24 units of
F
and 40 units of
L
, then in an Edgeworth box for Jack and his wife, an
allocation of
F
and
L
will be Pareto optimal only if it is at a corner
of the box.
II. MULTIPLE CHOICE
13.
Ella’s utility function is min{5
x
,
y
}. If the price of
x
is $10
and the price of
y
is $15, how much money would she need to be able to
purchase a bundle that she likes as well as the bundle (
x
,
y
) = (10,
25)?
a.
$209
b.
$440
c.
$425
d.
$475
e.
$85
14. Sam’s utility function is
U
(
x
,
y
) = 2
x
+
y
, where
x
is the number
of
x
’s he consumes per week and
y
is the number of
y
’s he consumes per
week. Sam has $200 a week to spend. The price of
x
is $4. Sam currently
doesn’t consume any
y
. Sam has received an invitation to join a club
devoted to the consumption of
y
. If he joins the club, Sam can get a
discount on the purchase of
y
. If he belonged to the club, he could buy
y
for $1 a unit. How much is the most Sam would be willing to pay to
join this club?