REVIEW QUESTIONS – MIDTERM 2
1.
Good 1 is normal, good 2 is normal and the two goods are substitutes (but not perfect substitutes).
Using budget lines and indifference curves, illustrate the effect of an
increase in p
2
on the
consumption of both x
1
and x
2
. Label income and substitution effects for both goods
2.
My utility function is U(x
1,
x
2
) = x
1
3
x
2
+ 8 and my utilitymaximizing bundle (at existing prices and my
income) consists of 3 units of x
1
and 2 units of x
2
. If p
1
= 10, what must p
2
equal?
3.
Joes demand for good 2 is given by x
1
*(p1,p2, I)=I/(3p
2
).
a. What is his ownprice elasticity of demand, E
x2
,
p2
, for good 2?
b. Bonus: What is his ownprice elasticity of demand, E
x1
,
p1
, for good 1?
4.
A consumer has preferences over leisure, Le, and disposable income, I. Use budget lines and
indifference curves to illustrate the case where a simultaneous halvng of the wage rate and a doubling
of nonwage income would have no effect on her optimal choice of
disposable income
.
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 Fall '07
 Babcock
 Economics, indifference curves, break up, budget lines

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