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Final420KSpring08

# Final420KSpring08 - Final Exam Spring 2008 1 Multiple...

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Final Exam Spring 2008 1 Multiple Choice (45) Q1 : Consider a two-state consumption choice under uncertainty, where ( x 1 ,x 2 ) denotes that one consumes x 1 if state 1 occurs and x 2 if state 2 occurs. Which condition below describes that the consumer is risk averse? (a) Completeness (b) Transitivity (c) Monotonicity (d) Convexity Q2 : Kevin’s preference is perfectly substitutive, where the marginal rate of substitution of good 2 for good 1 is 2/3. Which one of the following numerical representation represents his preference? (a) u ( x 1 ,x 2 ) = ln(2 x 1 + 3 x 2 ) (b) u ( x 1 ,x 2 ) = 2 ln x 1 + 3 ln x 2 (c) u ( x 1 ,x 2 ) = min { 2 x 1 , 3 x 2 } (d) u ( x 1 ,x 2 ) = 2 x 1 + 3 x 2 Q3 : Consider a demand function x 1 ( p 1 ,p 2 ,m ) = 2 m 2 p 1 + 3 p 2 , x 2 ( p 1 ,p 2 ,m ) = 3 m 2 p 1 + 3 p 2 Which statement is correct? (a) Good 1 is ordinary and Good 2 is a Giﬀen good. (b) Good 1 is a Giﬀen good and Good 2 is ordinary. (c) Both goods are Giﬀen. (d) Good 1 is a gross substitute of Good 2. (e) Good 1 is a gross complement of Good 2. Q4 : Consider a 2-good exchange economy with 2 consumers. Consumer A’s preference is represented by u ( x A 1 ,x A 2 ) = 2 ln x A 1 + ln x A 2 . Consumer B’s pref- erence is represented by u ( x B 1 ,x B 2 ) = 3ln x B 1 + 2ln x B 2 . Suppose the initial 1

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endowments are (15 , 9) for A and (10 , 8) for B, respectively. Then, in com- petitive equilibrium, (a) A sells good 1 and buys good 2, B buys good 1 and sells good 2. (b) A buys good 1 and sells good 2, B sells good 1 and buys good 2. (c) No trade occurs. (d) We cannot tell. Q5 : Consider an economy with risky endowments in which there are two states of the world, 1 and 2. State 1 occurs with probability 1 / 4 and state 2 occurs with probability 3 / 4. Assume that there is no aggregate risk, in the sense that the total aggregate of endowments is not aﬀected by states and only the distribution of endowments across agents is aﬀected. What is the relative price of the Arrow security associated with state 1 for the Arrow security associated with state 2? (a) 1/4 (b) 1/3 (c) 1/2 (d) 2/3 (e) 3/4 Q6 : There are two equally populated types of consumers, A and B. Their willingness to pay for a product is: A: \$21 for the 1st unit, and \$12 for the 2nd unit. B: \$15 for the 1st unit, and \$9 for the 2nd unit. There is a monopolist who can produce the good at a constant marginal cost of \$5. The monopolist knows the above numbers, but cannot verify whether a given customer is heavy or light. Then, which one of the pricing schemes below maximizes the proﬁt? (a) Charging \$9 for each unit. (b) Charging \$12 for each unit. (c) Charging \$21 for the 1st unit and \$12 for the 2nd unit. (d) Charging \$15 for the 1st unit and \$12 for the 2nd unit.
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Final420KSpring08 - Final Exam Spring 2008 1 Multiple...

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