Midterm

Part I
Multiple Choice (Each question has only one correct answer: 3pt*15=45pt)

1. Tim consumes only apples and bananas. He prefers more apples to fewer, but
he gets tired of bananas. If he consumes fewer than 29 bananas per week, he thinks that
1 banana is a perfect substitute for 1 apple. But you would have to pay him 1 apple for
each banana beyond 29 that he consumes. The indifference curve that passes through
the consumption bundle with 30 apples and 39 bananas also passes through the bundle
with A apples and 21 bananas, where A equals
a. 25.
b. 28.
c. 34.
d. 36.
e. None of the above.

2. Natalie consumes only apples and tomatoes. Her utility function is U (x, y) =
x2y8, where x is the number of apples consumed and y is the number of tomatoes
consumed. Natalie’s income is $320, and the prices of apples and tomatoes are $4 and
$3, respectively. How many apples will she consume?
a. 21.33
b. 16
c. 8
d. 48
e. None of the above.

3. Katie Kwasi’s utility function is U (x1, x2) = 5(ln x1) + x2. Given her current
income and the current relative prices, she consumes 10 units of x1 and 15 units of x2.
If her income doubles, while prices stay constant, how many units of x1 will she
consume after the change in income?
a. 10
b. 15
c. 5
d. 20
e. There is not enough information to determine how many.

4. Harvey Habit has a utility function U (c1, c2) = min {c1, c2}, where c1 and c2
are his consumption in periods 1 and 2 respectively. Harvey earns $147 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 $102.
b. Harvey will borrow $40.
c. Harvey will neither borrow nor lend.
d. Harvey will save $40.
e. None of the above.

5. Suppose that Agatha has $825 to spend on tickets for her trip. She intends to
spend the entire amount $825 on tickets and prefers traveling first class to traveling
second class. She needs to travel a total of 1,500 miles. Suppose that the price of first-
class tickets is $.60 per mile and the price of second-class tickets is $.30 per mile. How
many miles will she travel by second class?
a. 125
b. 400
c. 350
d. 250
e. 83.33

6. Peregrine consumes ($700, $880) and earns ($600, $990). If the interest rate is
0.10, the present value of his endowment is
a. $1,590.
b. $1,500.
c. $1,580.
d. $3,150.
e. $3,750.

7. Charlie consumes apples and bananas; his utility function is U (a, b) = ab.
Charlie’s fruit farm yielded 5 apples and 10 bananas. In addition, Charlie has $10 that
he was given by a secret admirer. Charlie can buy or sell apples at $2 each and he can
buy or sell bananas at $1 each. Charlie will consume
a. more apples and more bananas than he grows.
b. more apples and fewer bananas than he grows.
c. fewer apples and more bananas than he grows.
d. fewer apples and more bananas than he grows.
e. exactly as many apples as he grows and more bananas than he grows.

8.Billy Bob wants to gain some weight so that he can play football. Billy consumes
only milk shakes and spinach. Milk shakes cost him $1 each and spinach costs $2 per
serving. A milk shake has 850 calories and a serving of spinach has 200 calories. Billy
Bob never spends more than $20 a day on food and he always consumes at least 8,000
calories per day. Which of the following is necessarily true?
a. Billy Bob consumes at least 9 milk shakes a day.
b. Billy Bob never consumes more than 6 servings of spinach a day.
 c. Billy Bob never consumes positive amounts of both goods.
d. Billy Bob consumes only milk shakes.
e. None of the above.

9. If you have an income of $40 to spend, commodity 1 costs $4 per unit, and
commodity 2 costs $8 per unit, then the equation for your budget line can be written
a. x1/4 + x2/8 = 40.
b. (x1 + x2)/12 = 40.
c. x1 + 2x2 = 10.
d. 5x1 + 9x2 = 41.
e. 12(x1 + x2) = 40.

10. Mac’s utility function is U (x, y) = max {2x - y, 2y - x}.

11. Raymond’s preferences are represented by the utility function U (x, y) = x/y if y >
0 and U (x, y) = 0 if y = 0.
a. Raymond has indifference curves that are rectangular hyperbolas.
b. Raymond prefers more of each good to less.
c. Raymond has quasilinear preferences.
d. Raymond has a bliss point.
e. Raymond has indifference curves that are upward-sloping straight lines if y >
0.

12. Joe Bob’s cousin Peter consumes goods 1 and 2. Peter thinks that 4 units of good
1 is always a perfect substitute for 2 units of good 2. Which of the following utility
functions is the only one that would not represent Peter’s preferences?
a. U(x1, x2) = min{2x1, 4x2}.
b. U(x1, x2) = 20x1 + 40x2 - 10,000.
c. U(x1, x2) = 2x1 + 4x2 + 1,000.
d. U(x1, x2) = 4x21 + 16x1x2 + 16x22.
e. More than one of the above does not represent Peter’s preferences.

13. Elmer’s utility function is U (x, y) = min {x, y2}. If the price of x is $25 and the
price of y is $15 and if Elmer chooses to consume 7 units of y, what must his income
be?
a. $2,660
 b. $280
c. $1,430
d. $1,330
e. There is not enough information to determine his income.

14. Neville from your workbook has a friend named Cedric. Cedric has the same
demand function for claret as Neville, namely q = .02m - 2p, where m is income and p
is price. Cedric’s income is $6,000 and he initially had to pay a price of $40 per bottle
of claret. The price of claret rose to $60. The substitution effect of the price change
a. reduced his demand by 24.
b. reduced his demand by 40.
c. reduced his demand by 56.
d. increased his demand by 40.
e. reduced his demand by 34.

15. Holly consumes x and y. The price of x is 4 and the price of y is 4. Holly’s only
source of income is her endowment of 6 units of x and 6 units of y which she can buy
or sell at the going prices. She plans to consume 7 units of x and 5 units of y. If the
prices change to $7 for x and $7 for y,
a. she is better off.
b. she is worse off.
c. she is neither better off nor worse off.
d. she is better off if she has nonconvex preferences.
e. We can’t tell whether she is better off or worse off unless we know her utility
function.
Part Ⅱ
Problems(55pt)

1(8pt). Coach Steroid likes his players to be big, fast, and obedient. If player A is better
than player B in two of these three characteristics, Steroid will prefer A to B. Three
players try out for quarterback. Wilbur Westinghouse weighs 320 pounds, runs very
slowly, and is quite obedient. Harold Hotpoint weighs 240 pounds, runs extremely fast,
and is extremely disobedient. Jerry Jacuzzi weighs 150 pounds, runs at average speed,
and is extremely obedient. Does Coach Steroid have transitive preferences? Explain
your answer.

2(10pt). Les has the utility function U (x, y) = (x + 1) (y + 4). The price of y is $1. Les
spends all of his income to buy 6 units of y and no x. What must the price of x be?
Explain your answer and draw a diagram to illustrate it.

3(12pt). Briefly explain in a sentence or two how you could tell

4(10pt). Max has the utility function U (x, y) = x (y + 1). The price of x is $2 and the
price of y is $1. Income is $10. How much x does Max demand? How much y? If his
income doubles and prices stay unchanged, will Max’s demand for both goods double?

5(15pt). With some services, e.g., checking accounts, phone service, or pay TV, a
consumer is offered a choice of two or more payment plans. One can either pay a
high entry fee and get a low price per unit of service or pay a low entry fee and a
high price per unit of service. Suppose you have an income of $100. There are two
plans. Plan A has an entry fee of $20 with a price of $2 per unit. Plan B has an entry
fee of $40 with a price of $1 per unit for using the service. Let x be expenditure on
other goods and y be consumption of the service.
a. Write down the budget equation that you would have after you paid the entry
fee for each of the two plans.
b. If your utility function is xy, how much y would you choose in each case?
c. Which plan would you prefer? Explain.
Note: You should write down your answers on the ANSWER SHEET

and hand it in only!

Answer sheet

Student Number： Name ：

Part I (Single choice)

1. 2. 3. 4. 5.

6. 7. 8. 9. 10.

11. 12. 13. 14. 15.

Part Ⅱ (Problems)

1.
2.

3.
4.

5.