Which statement is true: 1. A Giffen good must be an inferior good, and the size of its income effect (IE) is greater than that of substitution effect (SE) 2. A Giffen good must be an inferior good, and the size of its SE is greater than that of IE 3. An inferior good must be a Giffen good 4. A Giffen good must be a normal good

1. A Giffen good must be an inferior good, and the size of its income effect (IE) is greater than that of substitution effect (SE)

Mid 2 Econ Flashcards by Amanda Fox

Suppose x1 and x2 are perfect substitutes with the utility function . If p1 = 1, p2 = 1, and income m = 10, what is the optimal bundle (x1, x2)? If all answers are correct, select option (IV).

(I) (x1, x2) = (10, 0)

(II) (x1, x2) = (0, 10)

(III) (x1, x2) = (5, 5)

(IV) All of the above is correct

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Suppose the utility function is given as . If p1 = 1, p2 = 5, and income m = 20, what is the optimal bundle (x1, x2)? If all answers are correct, select option (IV).

(I) (x1, x2) = (20, 0)

(II) (x1, x2) = (0, 4)

(III) (x1, x2) = (10, 2)

(IV) All of the above are correct

(I) (x1, x2) = (20, 0)

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Suppose good 1 and good 2 are perfect complements such that . This means at the optimal bundle: we want to consume___ of unit __ per ___ of unit __

We want to consume 1 unit of good 1 per unit of good 2

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Suppose the price of good 1 falls, so that the consumer now has virtually more money to spend on all goods. Which of the following is true if good 1 is a normal good?

Income effect for good 1 is positive

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Which statement is true:

A Giffen good must be an inferior good, and the size of its income effect (IE) is greater than that of substitution effect (SE)
A Giffen good must be an inferior good, and the size of its SE is greater than that of IE
An inferior good must be a Giffen good
A Giffen good must be a normal good

A Giffen good must be an inferior good, and the size of its income effect (IE) is greater than that of substitution effect (SE)

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The substitution effect of a price increase in good 1 means that:

We want to consume less of good 1, because it is relatively more expensive

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Assume leisure is a normal good. An increase in non-wage income results in…

Increase in leisure

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The reservation wage is the wage at which an individual…

Is just indifferent between working and not working

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Which of the following best describes the tradeoff involved in the labor supply model discussed in class?

Purchasing goods and services versus engaging in leisure

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Consider the intertemporal budget constraint shown below, with point (m1, m2) representing income in periods 1 and 2. A lender will choose a consumption bundle _____________ of this point.

to the left

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What happens to the intertemporal budget constraint when the interest rate r decreases?

The slope of the budget line pivots around the endowment point counterclockwise.

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What happens to the inter temporal budget constrain when the interest rate r increases?

The slope of the budget line pivots around the endowment point clockwise

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Consider a utility function 𝑢(𝑥1,𝑥2)=𝑎𝑥1+𝑏𝑥2 and a general-form budget line 𝑝1𝑥1+𝑝2𝑥2=𝑚.

If the absolute value of the slope of the indifference curve, 𝑎/𝑏, is greater than the absolute value of the slope of the budget line, 𝑝1𝑝2, the consumer will find it optimal to consume

all of good 1 she can afford and none of good 2.

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Consider a utility function 𝑢(𝑥1,𝑥2)=𝑎𝑥1+𝑏𝑥2 and a general-form budget line 𝑝1𝑥1+𝑝2𝑥2=𝑚.

If the absolute value of the slope of the indifference curve, 𝑎/𝑏, is greater than the absolute value of the slope of the budget line, 𝑝1𝑝2

demand for good 1 is 𝑥1’ (𝑝1,𝑝2,𝑚)=

demand for good 2 is 𝑥2’ (𝑝1,𝑝2,𝑚) =

m/p1
0

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Consider a utility function 𝑢(𝑥1,𝑥2)=𝑎𝑥1+𝑏𝑥2 and a general-form budget line 𝑝1𝑥1+𝑝2𝑥2=𝑚.

If the absolute value of the slope of the indifference curve, 𝑎/𝑏, is less than the absolute value of the slope of the budget line, 𝑝1𝑝2

𝑎𝑏<𝑝1𝑝2 what is demand for good 1?
demand for good 2?

m/p2

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Consider a utility function that represents preferences over perfect complements: 𝑢(𝑥1,𝑥2)=min{98𝑥1,49𝑥2}.

What are the demand functions 𝑥∗1(𝑝1,𝑝2,𝑚) and 𝑥∗2(𝑝1,𝑝2,𝑚)?

x1 = m/(p1+2p2)

x2 = 2m/(p1+2p2)

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Suppose utility for an average consumer over food and clothing is represented by 𝑢(𝑥,𝑦)=635.00𝑥𝑦. Find the optimal values of 𝑥 and 𝑦 as a function of the prices 𝑝𝑥 and 𝑝𝑦 and the income level 𝑚.

x* = m/2px
y* = m/2py

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Donald has a Cobb-Douglas utility function, 𝑥𝑦3.00. His income is $143.00, the price of 𝑥 is $19.00, and the price of 𝑦 is $11. The Lagrangian for maximizing Donald’s utility subject to his budget constraint is

𝐿=𝑥𝑦^3.00−𝜆(19.00𝑥+11𝑦−143.00) .

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The utility-maximizing bundle of 𝑥1 and 𝑥2 may, in some instances, be found at a point of tangency between the budget line and an indifference curve. In other instances, the utility-maximizing bundle will be found at a corner point—that is, where the quantity consumed of one good is zero. For which types of indifference curves shown below will the utility-maximizing bundle definitely be found at a corner point?

A and C

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With well-behaved utility functions, the utility-maximizing consumption bundle occurs at a point where the budget line is tangent to the highest attainable indifference curve. Which of the following mathematical expressions are true at the utility-maximizing point?

A. Marginal utility of 𝑥1=𝑝1
B. 𝑝1𝑥1+𝑝2𝑥2=𝑚
C. −MU𝑥1/MU𝑥2=−𝑝1/𝑝2
D. 𝑀𝑅𝑆=−𝑝1/𝑝2

All but A (Marginal utility of 𝑥1=𝑝1)

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The diagram below shows Juan’s preferences for cheeseburgers and pizzas. Juan’s income is $120. The price of one cheeseburger is $10 and the price of one pizza is $15. Use the line tool to draw Juan’s budget line. What are the maximizing quantities?

X int: 12
Y int: 8
Juans maximizing quantity of C: 12
Juans max quantity of P: 0

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Classify each case as:

Definitely YES (an interior solution is certain)

Definitely NO (an interior solution is impossible)

Possible (an interior solution might happen)

Perfect Complements

YES

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Classify each case as:

Definitely YES (an interior solution is certain)

Definitely NO (an interior solution is impossible)

Possible (an interior solution might happen)

Strictly Concave Prefs

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Classify each case as:

Definitely YES (an interior solution is certain)

Definitely NO (an interior solution is impossible)

Possible (an interior solution might happen)

A good and a Bad

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Classify each case as: Definitely YES (an interior solution is certain) Definitely NO (an interior solution is impossible) or Possible (an interior solution might happen) Discrete Goods

Possibly

Classify each case as: Definitely YES (an interior solution is certain) Definitely NO (an interior solution is impossible) or Possible (an interior solution might happen) Perf Subs

Possible

Classify each case as: Definitely YES (an interior solution is certain) Definitely NO (an interior solution is impossible) or Possible (an interior solution might happen) Convex Prefs

Possible

Classify each case as: Definitely YES (an interior solution is certain) Definitely NO (an interior solution is impossible) or Possible (an interior solution might happen) Strictly convex Prefs

Possible

Classify each case as: Definitely YES (an interior solution is certain) Definitely NO (an interior solution is impossible) or Possible (an interior solution might happen) Concave Prefs

Possible

In what situations will the tangency condition be sufficient for utility maximization? The tangency condition means the budget line is tangent to the indifference curve. A condition is sufficient if that condition by itself ensures that utility is being maximized.

When preferences are convex

The diagram below shows a budget set, bounded by the budget line. What property of well-behaved consumer preferences ensures that the utility-maximizing bundle will lie on the budget line, rather than on an interior point of the budget set?

Monotonicity

Which of the labeled bundles on the diagram are affordable (i.e., would not cost more than the consumer's income)?

A, C, D

Which of the labeled bundles would be the most preferred bundle for the consumer (regardless of income)?

Which labeled bundle is the most preferred bundle the consumer can afford?

The graph below shows indifference curves for perfect substitutes, which have the general-form utility function 𝑢(𝑥,𝑦)=𝑎𝑥+𝑏𝑦. If an individual has the preferences represented by the indifference curves above and can afford at least one of each good, will she ever choose to consume zero of one good?

Yes

The graph below shows indifference curves for perfect complements, which have the general-form utility function 𝑢(𝑥,𝑦)=min{𝑎𝑥,𝑏𝑦}. If an individual has the preferences represented by the indifference curves above and can afford at least one of each good, will he ever choose to consume zero of one good?

The graph below shows indifference curves for Cobb-Douglas preferences, which have the general-form utility function 𝑢(𝑥,𝑦)=𝑥𝑎𝑦𝑏. If an individual has the preferences represented by the indifference curves above and can afford at least one of each good, will she ever choose to consume zero of one good?

The graph below shows indifference curves for quasilinear preferences, of which one common general form is 𝑢(𝑥,𝑦)=𝑎√x+𝑏𝑦. If an individual has the preferences represented by the indifference curves above and can afford at least one of each good, will he ever choose to consume zero of one good?

Yes

Which types of preferences will always result in an interior optimum for utility maximization (assuming income is greater than $0)?

Cobb Douglass Perfect Complements

Yulia finds that her enjoyment of pizza (𝑥1) is greater when she has more soda (𝑥2) to consume. Which of the following utility functions reflects Yulia's preferences to the extent that her enjoyment of pizza is dependent on the amount of soda that she consumes?

x1^(1/2)x2^(1/2)

The diagram above shows Gisela's indifference curves for housing and all other goods. Which of the following statements regarding Gisela's preferences and utility function is true?

Gisela has preferences that are quasi-linear

Marissa always consumes 8 Oreos with 3 ounces of milk. She has no use for Oreos or milk if they are not consumed in this proportion. If Oreos are represented as 𝑅 and an ounce of milk is represented as 𝑀, which of the following utility functions would accurately represent her preferences?

u = mi{3r, 8m}

Albert's utility function can be written as u = 3G + M, where G represents pairs of gloves and M represents pairs of mittens. Based on Albert's utility function, which of the following statements are true? A. Albert is willing to trade 3 pairs of gloves for 1 pair of mittens. B. For Albert, gloves and mittens are perfect substitutes. C. For Albert, gloves and mittens are perfect complements. D. Albert is willing to trade 3 pairs of mittens for 1 pair of gloves.

B and D

Start with the Cobb-Douglas utility function 𝑢=𝑥17.0𝑥23.0. If we apply the monotonic transformation 𝑧=𝑢110, the resulting utility function is 𝑧=__________.

x1^(0.7)x2^(0.3)

Which of the following statements reflects the modern concept of economic utility?

Brian prefers pizza to asparagus

Bundle A is strictly preferred to bundle B, and bundle B is strictly preferred to bundle C. If the utility associated with B is 55, which of the following are possible utility levels for bundle A and bundle C? (The first element in the ordered pair represents the utility for bundle A, the second element in the ordered pair represents the utility for bundle B, and the third is for bundle C.)

(67, 55, 49)

Given a nominal interest rate of 1% and inflation rate of 3%, what is their real interest rate? Choose the nearest value.

-2%

If the annual interest rate is 5%, how much will $1,000 be worth 1 year from now? Choose the nearest value.

$1,050

Suppose the annual interest rate is 5%. What is the present value of receiving $1,000 one year from today? Choose the nearest value.

$950

Suppose you have $2,000 but, if an accident occurs, you incur a loss of $1,000. Assume no insurance is available. What is your maximum consumption in the “good” state, if no accident occurs?

$2,000

Suppose you have $2,000 but, if an accident occurs, you incur a loss of $1,000. Assume no insurance is available. What is your maximum consumption in the “bad” state, if an accident occurs?

$1,000

Suppose you have $2,000 but, if an accident occurs, you incur a loss of $1,000. Assume also that you can buy insurance at a rate of $0.20 per $1 of coverage. How much does it cost you to fully insure?

$200

If a consumer is indifferent between receiving $50 for sure and taking a gamble with a 25% chance of winning $200 and a 75% chance of winning nothing, the consumer is considered to be:

risk neutral

If a consumer strictly prefers a gamble with a 25% chance of winning $200 and a 75% chance of winning nothing to receiving $50 for sure, the consumer is considered to be:

risk loving

If a consumer strictly prefers receiving $50 for sure to a gamble with a 25% chance of winning $200 and a 75% chance of winning nothing, the consumer is considered to be:

risk averse

Producer surplus is graphically represented by:

the area between the supply curve and the price (y axis)

Suppose you can only buy apples in discrete units. Your reservation price for the first apple is $2.00; for the second, $1.50; for the third, $0.50, and $0 for any apple beyond the third. If the current price of an apple is $1.00, how many apples will you buy?

buy 2 apples

Suppose again that you can only buy apples in discrete units. Your reservation price for the first apple is $2.00; for the second, $1.50; for the third, $0.50, and $0 for any apple beyond the third. If the current price of an apple is $1.00, what is your consumer surplus?

Surplus of $1.50

Sally currently buys one apple, a normal good, at the price of $1 per apple. Suppose the price of apples increases to $2 per apple and Sally begins not buying apples at all. This is an example of a decrease in demand ___________. Fill in the blank correctly.

along the extensive margin

Oat milk and almond milk are substitutes for each other. If the price of oat milk decreases, what would we expect to happen to the demand curve for almond milk?

the demand curve shifts INWARD (to the left)

Suppose the price elasticity of demand is -0.8 at the current price and quantity. This means we are on a portion of the demand curve that is:

inelastic

Consider the market for smartphones. Recently a shortage of semiconductors has caused supply chain problems for manufacturers. As a result, every smartphone now costs more to produce than it did before. What happens to the equilibrium quantity sold?

the quantity decreases

Consider the market where consumers buy gasoline from gas stations. Suppose the government starts to collect a tax from consumers of $0.05/gallon. How does this change the supply and demand for gasoline?

the demand curve shifts down by $0.05/gallon

Canned soup is considered an inferior good. If the economy is experiencing a downturn, such that consumer incomes decrease, which of the following is most likely to happen in the market for canned soup?

Quantity increases and price increases

Mid 2 Econ Flashcards

(65 cards)