Question

2) If the price of automobiles were to increase substantially, the demand curve for gasoline would most likely

A) shift leftward. B) shift rightward.

C) become flatter. D) become steeper.

3) If the price of automobiles were to decrease substantially, the demand curve for automobiles would most likely

A) shift rightward. B) shift leftward.

C) remain unchanged. D) become steeper.

4) Suppose a market were currently at equilibrium. A rightward shift of the demand curve would cause

A) an increase in price but a decrease in quantity.

B) a decrease in price but an increase in quantity.

C) an increase in both price and quantity.

D) a decrease in both price and quantity.

5. Draw out examples of each of the following indifference curves: imperfect substitutes, perfect substitutes, and perfect complements.

6) If two bundles are on the same indifference curve, then

A) the consumer derives the same level of utility from each.

B) the consumer derives the same level of ordinal utility from each but not the same level of cardinal utility.

C) no comparison can be made between the two bundles since utility cannot really be measured.

D) the MRS between the two bundles equals one.

7) The consumer is in equilibrium when

A) MRT = MRS.

B) Px/Py = MUx/MUy.

C) the budget line is tangent to the indifference curve at the bundle chosen.

D) All of the above.

8. Jody enjoys having exactly 1 teaspoon of sugar with every cup of coffee she has. What does this say about her indifference curves between the two goods? What happens to her utility level when she is given 5 teaspoons of sugar with one coffee? (Just an explanation)

9) Jay’s Utility function is given by U(x,z) = 3x10.2 x20.8 and P1=$2 and P2=$4 and his budget is $200.

• Write out the Lagrange but don’t solve it

• Find the utility maximizing values of x1 and x2

10)What does the substitution effect cause a consumer to do if the price of a good increases?

11) What does the income effect cause a consumer to do if the price of a good increases? What else is needed here?

12) What can we say about the substitution and income effects on a decrease in wages? What is an Engel curve and how does it relate here? If leisure is viewed as an inferior good, how would the labor demand curve look?

13) Suppose m=120, p1= 5, and p2=6.

• What is the budget equation?

• What is the slope of the budget line?

• How does the budget set change with the following:

  • a 20% increase in m

  • a 2$ decrease in p2

Answer 1

2. The correct answer is 'Option A'.

If there is an increase in the price of automobiles then the demand of gasoline will fall because automobiles and gasoline are compliments of each other and an increase in price of a good leads to a fall in demand of other and vice versa. People will demand fewer automobiles due to a rise in price of it which ultimately leads to a fall in demand of gasoline which will cause the demand curve of gasoline to shift leftwards.

3. The correct answer is 'Option A'.

If there is a fall in the price of automobiles then it will result in more automobiles demanded by consumers which will shift the demand curve of automobiles to the right.

4. The correct answer is 'Option C'.

If the market is currently in equilibrium then a rightward shift in the demand curve with no change in supply will lead to an increase in equilibrium price as well as equilibrium quantity because there will be excess demand in the market.