ECN 3040 Quiz 4 Winter 2019
1. The Marshallian demand function is obtained by A) solving the expenditure minimization problem for the optimal value of the good conditional on prices and income. B) solving the expenditure minimization problem for the optimal value of the good conditional on prices and utility. C) solving the utility maximization problem for the optimal value of the good conditional on prices and utility. D) solving the utility maximization problem for the optimal value of the good conditional on prices and income.
2. The Hicksian demand function for good X states opitmal demand for X as a function of A) money income and utitlity. B) prices and utility. C) the inverted Lagrange multiplier. D) prices and money income.
3. For a normal good, the good's Hicksian demand curve is ______the good's Marshallian demand curve. A) the inverse of B) unrelated to C) steeper than D) flatter than
4. Billie Jean has utility function U XY0.6 0.4 . She has $100 of income to spend, the price
of X is PX $10 and the price of Y is PY $8 . At her optimal consumption bundle, Billie Jean
A) chooses {X 2, Y 10}and enjoys U1 10.6 units of utility.
B) chooses {X 4, Y 6}and enjoys U1 4.6 units of utility.
C) chooses {X 9, Y 8}and enjoys U1 8.6 units of utility.
D) chooses {X 6, Y 5} and enjoys U1 5.6 units of utility.
Page 1 5. Given the consumer has Cobb-Douglas utility function U XY1 , the Hicksian demand function for good X is I A) X H PX (1 )[I P ] B) X H Y PX 1 H PX C) X U 1 PY 1 H PY D) X U 1 PX
6. In order to decompose the total effect of a price change into substitution and income effects, it is necessary to solve all of the following EXCEPT the consumer's: A) expenditure-minimization problem at the original prices and new utility level. B) utility-maximization problem at the original prices. C) utility-maximization problem at the new prices. D) expenditure-minimization problem at the new prices and original utility level.
XM X H X M 7. The equation X is known as the PX P X I A) Slutsky Equation. B) Edgeworth Equation. C) Hicks Equation. D) Marshall Equation.
8. The Slutsky equation A) let's us forecast market level demand for public choice goods. B) is the dual of the Lagrangian equation. C) provides the necessary first order conditions for the consumer's expenditure minimization problem. D) breaks the total effect from a price change into the part due to the substitution effect and the part due to the income effect.
Page 2 9. When the price of good X changes, the size and direction of the income effect from the price change depend on all of the following EXCEPT: X M A) the change in the quantity of X when purchasing power is transformed . I B) whether the good is normal or inferior. C) the amount of good X the consumer buys in the first place. D) the change in the consumption of X as the price of X changes, holding utility constant.
10. According to the Slutsky equation, the income effect from a price change A) is smaller when the degree of substitutability between goods is small. B) is larger the larger is the initial consumption level of the good. C) is larger when the degree of substitutability between goods is large. D) is smaller the larger is the initial consumption level of the good.
11. Other things equal, the uncompensated price elasticity of demand ( ) is X, PX A) larger when the good is an inferior good.
B) smaller the larger is the income elasticity of demand ( X, I ). C) larger the larger is the compensated price elasticity of demand ( ). X, PX D) unrelated to the compensated price elasticity of demand ( ). X, PX
12. In 2018, the average household spent $1,178 on telephone services and $333 on nonalcoholic drinks. From this information, we can conclude, other things equal, that: A) the substitution effect of a price change will be larger for nonalcoholic drinks than for telephone services. B) the substitution effect of a price change will be larger for telephone services than for nonalcoholic drinks. C) an increase in the price of telephone services will cause a larger income effect than a similar increase in the price of nonalcoholic drinks. D) an increase in the price of nonalcoholic drinks will cause a larger income effect than a similar increase in the price of telephone services.
Page 3 13. Given that good X's price elasticity of demand may be expressed as: s , where is the compensated (Hicksian) price elasticity of XP,,,X XP X XXI X, PX
demand, sX is the share of income spent on good X, and X, I is the income elasticity of demand, it stands to reason that demand for an inferior good will be A) of the same elasticity as demand for a normal good. B) more elastic than demand for a normal good. C) could be either more elastic or less elastic than the demand for a normal good,
depending on the value of sX . D) less elastic than demand for a normal good.
14. If two goods are perfect complements, then, when the price of the good changes, A) the income effect is equal to 0. B) the total effect and the income effect are equal. C) the substitution effect is larger than the income effect. D) the total effect and the substitution effect are equal.
15. Brady, who has ordinary shaped indifference curves, buys 16 ounces of salt each year. Even when the price of salt doubles, Brady purchases exactly 16 ounces of salt. For Brady, salt is A) a Giffen good. B) a normal good. C) an inferior good. D) neither a normal nor an inferior nor a Giffen good, since price has no effect on Brady's demand for salt.
Page 4 Answer Key
1. D 2. B 3. C 4. D 5. D 6. A 7. A 8. D 9. D 10. B 11. C 12. C 13. D 14. B 15. C
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