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Unformatted text preview: Midterm 1 February 19, Tuesday, 2008. 1 Multiple Choice (60) Q1 : Consider a two-good economy, where the original price pair is ( p 1 ,p 2 ) and income is m . When the government taxes on good 1 by 3% per value and taxes on good 2 by $2 per unit, what is the new budget equation? (a) ( p 1 + 0 . 03) x 1 + 1 . 2 p 2 x 2 = m (b) ( p 1 + 0 . 03) x 1 + ( p 2 + 2) x 2 = m (c) 1 . 03 p 1 x 1 + 1 . 2 p 2 x 2 = m (d) 1 . 03 p 1 x 1 + ( p 2 + 2) x 2 = m Q2 : What does convexity of preference say? Choose the correct one from below. (a) In the context of portfolio choice, it implies that the investor prefers concentrating portfolio on one risky asset. (b) It says that the good becomes relatively more important as it becomes abundant. (c) It says that more consumption is better. (d) In the context of intertemporal choice, it implies one prefers smoothing her con- sumption stream. (e) None of the above. Q3 : Consider a utility function u that represents the preference of a given consumer. Suppose you double this and use another representation v = 2 u instead of u . Then, what happens to marginal utility (MU) and marginal rate of substitution (MRS)? (a) Both MU and MRS are doubled. (b) Nothing changes for both MU and MRS. (c) MU is doubled but MRS doesnt change (d) MU doesnt change but MRS is doubled. Q4 : Which of the functional forms below represent the same preference as u ( x 1 ,x 2 ) = 2ln x 1 + 4ln x 2 does? (i) u ( x 1 ,x 2 ) = 2 x 1 + 4 x 2 (ii) u ( x 1 ,x 2 ) = 0 . 5ln x 1 + ln x 2- 5 (iii) u ( x 1 ,x 2 ) = 4ln x 1 + 2ln x 2 (iv) u ( x 1 ,x 2 ) = x 1 3 1 x 2 3 2 1 (a) (i) and (ii) (b) (i) and (iii) (c) (i) and (iv) (d) (ii) and (iii) (e) (ii) and (iv) Q5 : Choose the correct statement about optimal choice. (a) Perfectly substitutive preference may result in spending nothing on some good. (b) At optimal choice, the marginal rate of substitution of good 2 for good 1 is equal to the relative price of good 1, regardless of types of preferences....
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