# Microeconomics Midterm

Today he has an income of 400 kopecks. Bread now costs him 20 kopecks a loaf and potatoes cost him 25 kopecks a sack. Assuming his preferences haven’t changed (and the sizes of loaves and sacks haven’t changed), when was he better off? A. He was equally well off in the two periods. B. He is better off today. C. He was better off 20 years ago. D. From the information given here, we are unable to tell. 15. Jose consumes rare books which cost him 8 pesos each and pieces of antique furniture which cost him 10 pesos each. He spends his entire income to buy 9 rare kooks and 11 pieces of antique furniture.

Engel has the same preferences as Jose, but faces different prices and has a different income. Engel has an income of 162 pounds. He buys rare books at a cost of 4 pounds each and pieces of antique furniture at a cost of 11 pounds each. A. Engel would prefer Joke’s bundle to his own. B. Jose would prefer Engel’s bundle to his own. C. Neither would prefer the other’s bundle to his own. D. Each prefers the other’s bundle to his own. E. We

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When pizzas cost $3 each and books cost $10 each, she consumed 30 pizzas and 3 books per month. The price of pizzas fell to $2. 90 each while the price of books rose to $1 1 each. The price change a. Made her worse off. C. Left her at least as well off as before and possibly helped her. D. Might have helped her, might have harmed her. We can’t tell which unless we observe what she consumed after the price change. E. Had the same effect as a $3 increase in her income. 17. Diana consumes commodities x and y and her utility function is IS(x, y) = ex.. Good x costs $2 per unit and good y costs $1 per unit.

If she is endowed with 3 units of x and 6 units of y, how many units of good y will she consume? A. 11 d. 14 18. Milton consumes two commodities in a perfect market system. The price of x is $5 and the price of y is $1 . His utility function is IS(x, y) = xx. He is endowed with 40 units of good x and no y. Find his consumption of good y. A. 110 b. 105 c. 50 d. 100 19. Rhoda takes a Job with a construction company. She earns $5 an hour for the first 40 hours of each week and then gets “double-time” for overtime. That is, she is paid $10 n hour for every hour beyond 40 hours a week that she works.

Rhoda has 70 hours a week available to divide between construction work and leisure. She has no other source of income, and her utility function is U = cry, where c is her income to spend on goods and r is the number of hours of leisure that she has per week. She is allowed to work as many hours as she wants to. How many hours will she work? A. 50 b. 30 c. 45 d. 35 20. Irene earns 8 dollars an hour. She has no nonlinear income. She has 30 hours a week available for either labor or leisure. Her utility function is IS(c, r) = cry, where c is Lars worth of goods and r is hours of leisure.

How many hours per week will she b. 13 c. 15 d. 10 4 21. Mario consumes eggplants and tomatoes in the ratio of 1 bushel of eggplants per 1 bushel of tomatoes. His garden yields 30 bushels of eggplants and 10 bushels of tomatoes. He initially faced prices of $25 per bushel for each vegetable, but the price of eggplants rose to $100 per bushel, while the price of tomatoes stayed unchanged. After the price change, he would a. Increase his eggplant consumption by 6 bushels. B. Decrease his eggplant consumption by at least 6 bushels. C. Increase his consumption of eggplants by 8 bushels. D. Crease his consumption of eggplants by 8 bushels. E. Decrease his tomato consumption by at least 1 bushel. Mr.. Cog has 18 hours per day to divide between labor and leisure. His utility function is IS(C, R) = CRY, where C is dollars per year spent on consumption and R is hours of leisure. If he has a nonlinear income of 40 dollars per day and a wage rate of 8 dollars per hour, he will choose a combination of labor and leisure that allows him to spend a. 184 dollars per day on consumption. B. 82 dollars per day on consumption. C. 12 dollars per day on consumption. D. 92 dollars per day on consumption. E. 38 dollars per day on consumption. Harvey Habit has a utility function U(CLC, co) = min{CLC, co}, where CLC and co are his consumption in periods 1 and 2 respectively. Harvey earns $189 in period 1 and he will earn $63 in period 2. Harvey can borrow or lend at an interest rate of 10%. There is no inflation. A. Harvey will save $60. B. Harvey will borrow $60. C. Harvey will neither borrow nor lend. D. Harvey will save $124. E. None of the above. Mr.. O. B. Candle has a utility function CLC, where CLC is his consumption in period 1 ND co is his consumption in period 2. He will have no income in period 2.

If he had an income of $70,000 in period 1 and the interest rate increased from 10 to 17%, a. His savings would not change but his consumption in period 2 would increase by an amount > $2,500. B. His consumption in both periods would decrease. C. His consumption in both periods would increase. D. His savings would increase by 7% and his consumption in period 2 would also increase. E. His saving would not change but his consumption in period 2 would increase by an amount < $2,500 5 25. Mandy has an income of $800 in period 1 and will have an income of $500 in period 2.

Her utility function is U(CLC, co) = co. Coco. 202, where CLC is her consumption in period 1 and co is her consumption in period 2. The interest rate is . 25. If she unexpectedly won a lottery which pays its prize in period 2 so that her income in period 2 would be $1,000 and her income in period 1 would remain $800, then her consumption in period 1 would a. Stay constant. B. Double. C. Increase by $320. D. Increase by $400. E. Increase by $320. 26. Molly has income $200 in period 1 and income $920 in period 2. Her utility function is calla-ay, where a = 0. 0 and the interest rate is 0. 15. If her income in period 1 doubled and her income in period 2 stayed the same, her consumption in period 1 would a. Increase by $160. C. Increase by $80 d. Stay constant. E. Increase by $200. 27. Harvey Habit has a utility function U(CLC, co) = min{CLC, co}. If he had an income of $1,230 in period 1 and $615 in period 2 and if the interest rate were 0. 05, how much b. $465 c. $1,395 d. $310 e. $930 28. In an isolated mountain village, the harvest this year is 6,000 bushels of grain and the arrive next year will be 900 bushels.

The villagers all have utility functions IS(co, co) = CLC, where CLC is consumption this year and co is consumption next year. Rats eat 40% of any grain that is stored for a year. How much grain could the villagers consume next year if they consume 1,000 bushels of grain this year? A. 5,850 bushels b. 3,000 bushels c. 3,900 bushels d. 6,900 bushels e. 1,000 bushels 6 29. Ronald has $18,000. But he is forced to bet it on the flip off fair coin. If he wins he has $36,000. If he loses he has nothing. Arnold’s expected utility function is . Xx. 5 + . Ay. Where x is his wealth if heads comes up and y is his wealth if tails comes up. Since he must make this bet, he is exactly as well off as if he had a perfectly safe income of a. $16,000. B. $15,000. C. $12,000. D. $11,000. E. $9,000. Billy Pigskin has a von Neumann-Northeastern utility function If Billy is not injured this season, he will receive an income of $16 million. If he is injured, his income will be only $10,000. The probability that he will be injured is . 1 and the probability that he will not be injured is . 9. His expected utility is a. 3,610. B. Between 15 million and 16 million. 100,000. D. 7,220 14,440. Willis only source of wealth is his chocolate factory. He has the utility function PC f + (1 – p)c NFG, where p is the probability of a flood, 1 – p is the probability of no flood, and CB and CNN are his wealth contingent on a flood and on no flood, respectively. The probability off flood is p = . The value of Willis factory is $500,000 if there is no flood and $0 if there is a flood. Wily can buy insurance where if he buys $x worth of insurance, he must pay the insurance company $2 X 7 whether there is a flood or not but he gets back $x from the company f there is a flood.

Wily should buy a. No insurance since the cost per dollar of insurance exceeds the probability of a flood. B. Enough insurance so that if there is a flood, after he collects his insurance, his wealth will be of what it would be if there were no flood. C. Enough insurance so that if there is a flood, after he collects his insurance, his wealth will be the same whether there was a flood or not. D. Enough insurance so that if there is a flood, after he collects his insurance, his wealth will be e. Enough insurance so that if there is a flood, after he collects his insurance, his 2.

Hooray’s expected utility function is PC 1 + (1 – p)c 2, where p is the probability that he consumes CLC and 1 – p is the probability that he consumes co. Hooray is offered a choice between getting a sure payment of $Z or a lottery in which he receives $2,500 with probability . 30 and $3,600 with probability . 70. Hooray will choose the sure payment if a. Z > 3,249 and the lottery if z < 3,249. b. Z > 2,874. 50 and the lottery if z < 2,874. 50. c. Z > 3,600 and the lottery if z < 3,600. d. Z > 3,424. 50 and the lottery if z < 3,424. 50. e. Z > 3,270 and the lottery if z < 3,270. 7 8

# Microeconomics Midterm

Economics to PU bill sector: externalities definition of externalities. Why externalities can make market outcomes inefficient. The various government policies aimed at solving the problem of externalities. How people can sometimes solve the problem of externalities on their own. Why private solutions to externalities sometimes do not work. (5) Economics of public sector: public goods and common resources (a) the defining characteristics of public goods and common resources. Me of the important public goods and common resources in our economy. Why private markets fail to provide public goods. Why the cost-benefit analysis of public goods is both necessary and difficult. Why people tend to overuse common resources. (6) Economics of public sector: the design of the tax system (a) how the U. S. Government raises and spends money. The efficiency and the costs of taxes. Alternative ways to Judge the equity of a tax system. Why studying tax incidence is crucial for evaluating tax equity. The trade-off between efficiency and equity in the design of a tax system.