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ECN100 MT1 S09 Key Parman

ECN100 MT1 S09 Key Parman - Ecn 100 Intermediate...

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Ecn 100 - Intermediate Microeconomic Theory University of California - Davis April 21, 2009 Instructor: John Parman Midterm 1 - Solutions You have until 4:30pm to complete this exam. Be certain to put your name, id number and section on both the exam and your scantron sheet and fill in test form A on the scantron. Answer all multiple choice questions on your scantron sheet. Choose the single best answer for each question; if you fill in multiple answers for a question you will be marked wrong. Answer the long answer questions directly on the exam. You must show your work for full credit. Answers may be left as fractions. Please place a box around final answers when appropriate. Good luck! Name: ID Number: Section: SECTION I: MULTIPLE CHOICE (60 points) 1. Jack’s utility from chips (C) and salsa (S) is given by the function U(C,S). If U (4 , 2) = 10, U (2 , 4) = 10 and Jack has convex preferences, we can say that: (a) U (3 , 3) 10. (b) U (1 , 6) 10. (c) U (3 , 3) 10. (d) U (1 , 6) 10. (a) Notice that (3,3) is an average of the two bundles given in the problem. Since both of those bundles give a utility of 10 and Jack’s preferences are convex, the average bundle must give Jack a utility of at least 10. 2. If bananas are an inferior, ordinary good, the the Engel curve for bananas is and the demand curve for bananas is . (a) Upward sloping, downward sloping. (b) Upward sloping, upward sloping. (c) Downward sloping, upward sloping. (d) Downward sloping, downward sloping. (d) Since bananas are an inferior good, a higher quantity of bananas will be con- sumed at lower income levels. This implies a downward sloping Engel curve. Since bananas are ordinary, demand will increase as price decreases producing a down- ward sloping demand curve. 3. Currently Jill is consuming positive amounts of books and magazines. At her current level of consumption, the marginal utility of a book is 4 utils and the marginal utility of a magazine is 3 utils. If the price of a magazine is $1 and the price of a book is $3, Jill can increase her utility by: (a) Buying more books and fewer magazines. (b) Buying more magazines and fewer books. (c) Buying fewer books and fewer magazines.
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2 Midterm 1 - Solutions (d) Not enough information. (b) If Jill buys one less book, she can buy three more magazines. The loss in utility from giving up a book would be 4 utils while the gain in utility from three more magazines would be 9 utils. Clearly, Jill can increase her utility by buying fewer books and more magazines.
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