Second_Midterm_2006_answers - Make sure you write your name...

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Make sure you write your name and number IN THE BLUE BOOK. THE ONLY ANSWERS WE WILL CONSIDER ARE THE ONES IN THE BLUE BOOK NOT IN THE TEST! I.- True or False. PAY ATTENTION TO THE INSTRUCTIONS. Of the following questions ONLY FOUR ARE FALSE. Your job is to identify which four are false (8 points for identifying ALL four) and to justify why they are false (10 points per question, no points for the wrong explanation, total 48 points). You ONLY need to identify and justify the FALSE statements. 1.- With quasilinear preferences, the equivalent variation and the compensating variation in income due to a tax are the same. TRUE (directly from the notes!) 2.- Bernice’s utility function is U ( x , y ) = min{ x , y }. The price of x used to be 3 but rose to 4. The price of y remained at 1. Her income is 12. She would need an income of $16 to be able to afford a bundle as good as her old one at the new prices. FALSE Consumption takes place in fixed proportion x=y so in the original situation 3x+1y=12 but x=y so 4x=12 or x=3 and y=3 and the utility level attained is u=3. Let m denote the income needed to obtain a utility level of 3. Notice that to obtain a utility level of 3 I need x=y=3 (so that the min(x,y)=3). Under the new prices 4x+1y=m but x=y=3 to obtain the old utility of 3 so 4*3+3=m or m=15 not 16 as stated in the question. 3.- Marginal revenue is equal to price if the demand curve is horizontal. TRUE 4.- The inverse demand for a good is given by p = 60 - 2 q . Suppose that the number of consumers doubles. (For each consumer in the market another consumer with an identical demand function appears.) The demand curve shifts to the right, doubling demand at every price, while the slope of the demand curve stays unchanged. FALSE
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Second_Midterm_2006_answers - Make sure you write your name...

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