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Unformatted text preview: Final Exam 2008 QUESTION 1 [20 marks] A consumer has the utility function 2 1 2 1 y x 6 U = where x and y are the two goods . (a) Find the marginal rate of substitution between the two goods when x = 25 and y=200 . [5 marks] (b) Suppose the consumer has a budget of $2,700 to spend, and that the price of good x is $90 and the price of good y is $15. What is the optimal consumption bundle of x and y ? [5 marks] (c) What is the demand curve equation for x if the price of y is fixed at $1 and the budget remains $2,700? [5 marks] (d) Holding the price of y at P y =1 , use a linear approximation to the demand curve to calculate roughly the change in consumer surplus when the price of x falls from P x = 10 to P x = 6. QUESTION 2 [20 marks] (a) Using clearlylabelled diagrams, show how the labour supply curve is derived from the labour/leisure tradeoff faced by a representative worker. [5 marks] (b) Suppose a tax on wage income is imposed, and that as a result labour supply falls. Does this mean that the substitution effect is more powerful than the income effect, or the other way round? Explain your answer carefully. [5 marks] (c) Returning to the initial situation, suppose all workers are charged a lump sum tax payable in cash. The amount of the tax is the same regardless of hours worked. Could this tax have the effect of reducing labour supply? Explain your answer, using an appropriate diagram. [5 marks] QUESTION 3 [20 marks] (a) If the price of labour increases by 35% while all other input prices remain the same, would the longrun total cost of producing a given output rise by more than 35%, less than 35%, or 35% exactly? Explain your answer carefully, using a clearly labelled diagram or diagrams. Assume that the underlying production function is CobbDouglas. (b)Would a perfectly competitive firm continue to produce if price fell below its...
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This note was uploaded on 05/24/2011 for the course ECON 201 taught by Professor Paulclacott during the Fall '10 term at Victoria Wellington.
 Fall '10
 PaulClacott
 Microeconomics, Utility

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