ECO 3153 Study Guide - Midterm Guide: Expenditure Function, Utility Maximization Problem, Budget Constraint

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orangegiraffe962

14 Jul 2014

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There are 5 questions in this test and 50 points in total. This means that you should budget about 1. 5 minutes per mark. No electronic device that can be programmed with text, or that has transmitting possibilities can be used. Suppose that the function u1(x) assigns the following numbers to these bundles: 10, 14, 22 and the function. U2(x) assigns the numbers: 1, 100, 101 to these bundles. Explain. (2 marks: suppose that u(x1 , x2 ) = x1. 0. 25: write out the lagrangian function for the utility maximization problem and write out the first-order necessary conditions. (4 marks, calculate the demand functions for x1 and x2. Are these marshallian or hicksian demand functions? (7 marks: suppose that initially income, m, is 60, p1 = p2 = and then p1 falls to . Suppose that the price of good i increase.

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1. Read the original "Wealth of Nations" from Adam Smith, Book 1, chapter 1, 2 & 3. The link to this book is located in the resources button/tab, called "The Wealth of Nations."

Compose a paragraph of no more than 10 lines, and explain what the main ideas are from those readings.

2. The following chart shows the evolution of monthly oil prices from 1986 to 2016. https://learn.vccs.edu/bbcswebdav/pid-3153577-dt-forum-rid-91732458_2/courses/BR291.ECO.201.01.FA16/Petroleum%20Prices%281%29.jpeg. The source of the data is the U.S Energy Information Administration.

As you see from the chart, prices go up and down. Based on the economic theory that you have read in chapter 3, answer in no more than 10 lines what could explain the big variations in oil prices that we observe from 2005 to 2016?

Support both answers with theoretical concepts from chapters 1, 2 & 3.

coffeeturtle500

Consumer theory can, at times, seem abstract and not relatable to the real world. Pick an example of some consumer decision you made this week and explain the thought process that went into making that decision. This for example may have been deciding which restaurant to go to, or even better, which meal to order at that restaurant.

How did prices affect that decision? What about your budget? Relate your thought process to the concepts we have discussed in module 2: utility, budget constraints, indifference curves etc.

Finally, discuss if you think that the theory described this week does a sufficient job in capturing the main essences of how you made your decision. If not, which aspects of the theory fall short?

Please answer the following questions:

Your firm manages money for a professional tennis player Maria Juarez. She has asked you to give her information about what determines the level of various interest rate. Your boss has prepared some questions for you to consider. Please answer the following questions:

5. What is the pure expectations theory? What does the pure expectation theory imply about the term structure of interest rate?

6. Suppose you observe the following term structure for treasury securities (see grid) below, now assume that the pure expectations theory of the term structure is correct. (This implies that you can use the yield curve provided to âback outâ the marketâs expectations about future interest rates.) What does the market expect will be the interest rate on 1-year securities 1 year from now? What does the market expect will be the interest rate on 3-year securities 2 years from now? Calculate these yields using geometric averages. Maturity Yield 1 year 6.0% 2 years 6.2% 3 years 6.4% 4 years 6.5% 5 years 6.5%

7. Describe how macroeconomic factors affect the level of interest rates. How do these factors explain why interest rates have been lower in recent years?

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ECO 3153 Study Guide - Midterm Guide: Expenditure Function, Utility Maximization Problem, Budget Constraint

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