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Prelim%201%20Solutions

# Prelim%201%20Solutions - Economics 3010 Fall 2008 Professor...

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1 Economics 3010 Professor Daniel Benjamin Fall 2008 Cornell University EXAM #1 SOLUTIONS I. True / False / Uncertain Your grade on these questions will depend on the generality, completeness, and persuasiveness of your explanation, not simply on whether the “true” or “false” is correct. The objective here is to provide an answer that convinces; not merely an answer that is “not wrong.” At the very least, make sure that you give clear definitions for the relevant economic terms used in the question. Please use a separate blue book for this section. (5 points) 1) The opportunity cost of going to college includes not only the foregone income from working full time, but also all the time and effort spent going to high school. False. 2 points : The opportunity cost is the foregone benefit of the next best alternative. 2 points : So the foregone income from working full time is part of the opportunity cost of going to college. 1 point : But the time and effort spent going to high school is a cost incurred whether or not you go to college. (It is a “sunk cost.”) (5 points) 2) The demand for narrow categories of goods (like milk) tends to be more elastic than the demand for broader categories (like food). True. 2 points : The elasticity of demand is the percent change in quantity demanded per one percent change in price. 3 points : Narrow categories of goods (like milk) have more substitutes (e.g., other beverages such as OJ) than broader categories (like food). When the price increases, quantity demanded of the good in question will fall by more because consumers will substitute consumption of other goods. (5 points) 3) The fact that the marginal rate of substitution between two goods equals the price ratio at a consumer’s optimum means that every consumer gets exactly the same level of utility from those two goods. False. 2 points : The formula is MRS = MU(x 1 ) / MU(x 2 ) = p 1 / p 2 . 2 points : The correct statement is that every consumer has the same MRS (or ratio of MUs) from the two goods.

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2 1 point : This means that on the margin (i.e., for the last unit purchased), every consumer has the same relative increase in utility from the two goods.
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Prelim%201%20Solutions - Economics 3010 Fall 2008 Professor...

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