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AP/ECON 4010A:ADVANCED MICROECONOMIC THEORY MIDTERM EXAM ANSEWRS OCTOBER 2010 SECTION A: Short Answers. 1. 1. False. MRS can be diminishing even if MU is not. Check the condition for quasi concavity: The condition for DMRS is: f 2 2 f 11 – 2f 1 f 2 f 12 + f 1 2 f 22 < 0, which may be true even if f 11, f 22 > 0, ie MUs were increasing. Example: U = (xy) 2 . 2. True. See. Text fig, 4.7 3. False. Utility function is u = min { x, 2y }. The consumption ratio is x = 2y. Substituting in the budget constraint I = p x x + p y y , x = y = I/(2p x + p y ). 4. False. Square the function to get u = x 2 + y 2 (this is a monotonic transformation and represents the same preference). MRS = x/y, which rises as x rises and y falls. Indifference curves are concave. 5. Uncertain. When prices are the same for perfect substitutes, consumer is indifferent between any bundle along the budget line including the midpoint. 6.
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This note was uploaded on 09/01/2011 for the course ECON 4010 taught by Professor Mahmudulanam during the Fall '10 term at York University.

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