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 utility-maximizing 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
2
*(p1,p2, I)=I/(3p
2
).
a. What is his own-price elasticity of demand, E
x2
,
p2
, for good 2?
b. Bonus: What is his own-price 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 non-wage income would have no effect on her optimal choice of
disposable income
.
5.
a. Using indifference curves and budget lines in the (c
1
, c
2
) plane, illustrate a situation in which an
increase in the interest rate, r, causes someone who was originally
saving
to save
less
.
b. Does the substitution effect cause the person to save more or less? Explain why. (Just use logic—
you don’t need to draw or label income and substitution effects, unless you want to).
6.
a. If STC(Q, w, r,
K
)= wQ
2
/(
K
+1)+ r
K
, what is that firm’s production function?
b. A firm’s short-run total cost function, STC(Q,w,r,
K
) is such that STC(10, 2, 3, 4)=40. How much
labor
does the firm use to produce 10 units of output?