# PS3 - I TRUE OR FALSE(You do not need to give a...

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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

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