ECON 10A Study Guide - Midterm Guide: Reservation Wage, Baseball Cap, Reservation Price

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15 Oct 2018

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Practice questions: se/ie/te for two goods : u(x,y)=max{4x,y}, price of good x is , price of good y is , income is . Before the tax : competitive equilibrium, consumer surplus, producer surplus. After the tax : producer price, consumer price, quantity demanded, consumer surplus, producer surplus, tax revenue, deadweight loss: demand is given by p=16-4q. A tax is levied on buyers: demand is given by p=16-4q. An tax is levied on sellers: expected utility (fall 17 midterm 2 free response) eric"s utility is the square root of weekly consumption. He is given the following two risky options: with 50% probability, with 50% probability, with 50% probability, with 50% probability. If eric is indifferent between the two options, what is x: investing and present valu e (summer 17 midterm 2 multiple choice) cali currently has ,000 that she wants to buy a new car with. The car currently has a cost of ,000.

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15. (From Web Quiz) Which of the following statements is correct about the Income Effect (IE) and the Substitution Effect (SE) of a change in the price of Good X: a) If IE and SE work in the same direction, then X is an inferior good b) If IE and SE work in opposite directions, then X is a normal good c) If IE and SE work in opposite directions, then X could have downward-sloping demand * d) If IE and SE work in the same direction, then X could have upward-sloping demand e) All of a) through d) are incorrect.

2. Plot the initial budget line Blo, the new budget line BL1 and the compensated budget line BLC after the price of X, increases. Then, plot the substitution effect SE, the income effect IE, and the total effect TE for each of the two consumers according to their indifference curves. Please note that the focus of this question is not on finding the exact quantities of each good that these consumers would be purchasing before and after the price change. (30 marks) 2. (a) Adam lives in Australia and his income is 300. Initially, the price of X, is 6 and the price of X2 is 10. Then, the price of xı increases to 12 while the price of X2 and his income remain unchanged. Use your findings on SE, IE, TE, and lecture discussion to help you explain whether (i) X1 is a normal good and (ii) the demand curve for Xi is downward-sloping (13 marks) 40 0 5 10 15 20 25 30 35 40 45 50 x1 2. (b) Beatrice lives in Barbados and her income is 700. Initially, the price of Xi is 7 and the price of xz is 10. Then, the price of Xı increases to 14 while the price of x2 and her income remain unchanged. Use your findings on SE, IE, TE, and lecture discussion to help you explain whether (i) x1 is a normal good and (ii) the demand curve for Xi is downward- sloping. (14 marks) -U3 02 10 o 20 30 40 50 60 70 80 90 100 x;* 2. (c) Is Xi a Giffen good to Adam or Beatrice? What are the conditions for a good to become a Giffen good? (3 marks)

1. Assume that beer is an inferior good for Wei. If the price of beer goes up, then the total effect results in Wei buying _______ beer and the substitution effect results in Wei buying ______ beer.

	a.	more, more
	b.	more, less
	c.	less, more
	d.	less, less
	e.	not enough information to determine

2. A consumer has preferences that are complete, transitive and satisfy the "more is better" property. Which of the following statements are necessarily true?

	a.	Indifference curves are negatively sloped.
	b.	Indifference curves do not cross.
	c.	Indifference curves exhibit diminishing marginal rates of substitution.
	d.	Both a) and b) are true.
	e.	a), b), and c) are true.

3. Suppose an individual has preferences over two goods - good X and good Y. In response to changes in the price of good X, the individual has a positively sloped price consumption curve, where good X is drawn on the horizontal axis. Which of the following statements is true?

	a.	Good Y is a normal good.
	b.	Good Y is a Giffen good.
	c.	Good Y is a complement for good X.
	d.	Good Y is an inferior good.
	e.	Good Y is a substitute for good X.

ECON 10A Study Guide - Midterm Guide: Reservation Wage, Baseball Cap, Reservation Price

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