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4010ansA

# 4010ansA - AP/ECON 4010A:ADVANCED MICROECONOMIC THEORY...

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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. True. From the homogeneity property of elasticities: 0 = e x,p x + e x,p y + e x, I .
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