Question

11) Which one of the following is NOT true about a competitive equilibrium in a one-period,
closed economy model?
A) MRS = MRT
B) Y = C + G
C) MP K = w
D) G = T
E) N D = N S
12) Why do consumers smooth consumption?
A) To maximize today’s consumption
B) To maximize lifetime consumption
C) To maximize lifetime utility
D) To minimize debt
E) None of above
13) Consider the standard labor-leisure choice model. Consumer gets utility from consumption
(C) and leisure (L). She has H total hours. She works N S hours and receives the hourly wage, w.
She has some non-labor income π and pays lump-sum tax T. Further suppose (π – T) > 0. The
shape of utility function is downward-sloping and bowed-in towards the origin (the standard U-
shaped case just like a cobb-douglas function) If this consumer decides to NOT WORK AT ALL,
then it must be the case that
A) |MRS L,C | = |w|
B) |MRS L,C | < |w|
C) |MRS L,C | ≥ |w|
D) MU L = MU C
E) None of above
14) Suppose a production function of Y = zKN. If z = 3, K = 5, N = 15 , what is the equilibrium
wage?
A) 3
B) 10
C) 15
D) 30
E) None of above
15 ) What assumption do we need for consumption smoothing?
A) Diminishing marginal utility of consumption
B) Big enough interest rate
C) Credit market imperfection
D) All of above
E) None of above

Answer 1

11) option C).

MPK = r : rental rate of capital

whereas w = wage rate = MPL

12) option C)

Purpose of consumption smoothing is to stable the consumption profile over life time, thus transfer consumption in high periods to low consumption periods

13) option B)

No work If, MRS < w

MUL/MUC < w

MUL/w < MUC

14) option C)

MPN = wage

= zK

=3*5

= 15

15) option A)

For consumption smoothing, equal level of consumption in all periods ,

Utility function must be Concave ,

So MU should Diminish