ECO479Spring2011HW1-1 - ECO 479 Spring 2011 Professor...

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1 ECO 479 Spring 2011 Professor Yelowitz Homework 1 Distributed: Tuesday February 1, 2011; Due Thursday, Feb. 10, 2011, in class Worth 3 points overall; covers chapters 1, 2, 3 of Gruber 1. Suppose that you buy a lot of music and that prices of CDs go down. The substitution effect means that you buy _____ CDs because _____. A) more; your nominal income has been increased B) more; your real income has been increased C) more; you now enjoy music more D) fewer; CDs are more abundant E) None of the above. 2. Suppose that a 50% increase in price causes a 66% reduction in the quantity demanded. The elasticity of demand, when rounded to two decimal places, is: A) -0.75 B) +0.75 C) -1.33 D) +1.33 E) None of the above. 3. Suppose that because the government increases the minimum wage, employees who were earning the minimum wage have their hours reduced. This is an example of: A) an intended effect B) an indirect effect C) a direct effect D) both (A) and (C) E) None of the above 4. If pasta is an inferior good and the price of pasta decreases, the income effect _____ the quantity demanded and the substitution effect ____ the quantity demanded. A) decreases; decreases B) decreases; increases C) increases; decreases D) increases; increases E) does not affect; does not affect 5. Assume an individual consumes movies and CDs, denoted by M and C . His utility function is ܷ ൌ ܯ ܥ . The pric e of movies is $0.75 and the price of CD’s is $1, while his income is $540. Compute the number of movies and CD’s he consumes when he maximizes utility. 6. Assume the market for movies is characterized by the following inverse demand and supply curves:
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This note was uploaded on 02/07/2011 for the course ECO 479 taught by Professor Staff during the Spring '08 term at Kentucky.

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ECO479Spring2011HW1-1 - ECO 479 Spring 2011 Professor...

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