This preview shows pages 1–2. Sign up to view the full content.
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
.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
 Fall '07
 Babcock

Click to edit the document details