Chapter 4: Practice Quiz Utility Maximization Maxi mization and Choice 1.
“If an ind indiv ivid idua uall is is to maxi maxim mize ize the the utili utility ty recei received ved from from cons consum umpt ption ion,, he or she she shoul should d spend all available income. . . .” This statement statemen t assumes a. that saving is impossible. b. that the individual individual is not satiated satiated in all goods. c. that no goods are “inferior “inferior.” .” d. both a and b above.
2.
uppose an individual!s MRS "of "of stea# for beer$ is 2%1. That is, at the current consumption choices he or she is is &illi &illing ng to give up 2 beers to get an extra stea#. uppose also that the price of a stea# is '1 and a beer is '(.2). Then in in order to increase utility utility the the individual individual should a. buy more stea# and less beer. b. buy more beer and and less stea#. stea#. c. continue &ith current consumption plans.
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uppose uppose that that at current current consu consumpt mption ion lev level elss an ind indiv ivid idua ual! l!ss marg margin inal al utili utility ty of of consum consumin ing g an extra hot dog is 1( &hereas the marginal utility of consuming an extra soft drin# is 2. Then the MRS "of "of soft drin#s d rin#s for hot dogs$+that is, the number of hot dogs the individual individual is &illing to give up to get one more soft drin#+is a. ). b. 2. c. 12. d. 1).
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If an indivi individua dual! l!ss indif indiffe feren rence ce curve map does not not obey obey the assum assumptio ption n of a dimi dimini nish shin ing g MRS , then a. the individual &ill not maximize maximize utility. utility. b. the individua individuall &ill &ill buy none of good X . c. tang tangen enci cies es of of ind indiifferen erence ce cur curve vess to the the budge budgett const constra rain intt may may not not be poi point ntss of utility maximization. maximization. d. the budget constraint cannot be tangent to an appropriate indiff indifferenc erencee curve.
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n incr increas easee in an ind indiv ivid idua ual! l!ss incom incomee &itho &ithout ut chang changin ing g relat relative ive prices prices &ill &ill a. rot rotate ate th the bu budget constraint about bout the x axis. b. shift the indiff indifferen erence ce curves out&ard. c. shi shift the the bud budge gett cons constr trai aint nt out& out&ar ard d in in a para paralllel lel &ay &ay. d. rot rotate ate th the bu budget constraint abo about ut the y axis.
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The sl The slope ope of of the the budg budget et cons consttrai raint line is a. the ratio of the prices " p p x /p /p y$. b. the negative of the ratio of the prices prices " p p x /p /p y$. c. the the rat ratio io of incom omee div divided by pri price of y " I/p I/p y$. d. none of the above.
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Chapter 9/Profit Maximization
0.
If the price of x falls, the budget constraint a. shifts out&ard in a parallel fashion. b. shifts in&ard in a parallel fashion. c. rotates out&ard about the xintercept. d. rotates out&ard about the yintercept.
.
uppose that an individual has a constant MRS of shoes for snea#ers of 3 "that is, he or she is al&ays &illing to give up * pairs of snea#ers to get - pairs of shoes$. Then, if snea#ers and shoes are e4ually costly, he or she &ill a. buy only snea#ers. b. buy only shoes. c. spend his or her income e4ually on snea#ers and shoes. d. &ear snea#ers only *- of the time.
5.
If an individual!s utility function is given by U " x, y $ = xy and I 6 1((, p x 6 1, p y 6 -, his or her preferred consumption bundle &ill be% a. "2(, 2($. b. ")(, 12.)$. c. "-(, 1)$. d. "*(, 1)$.
1(.
If utility is given by U " x, y $ = x 2 + y 2 and p x 6 2, p y 6 *, I 6 )(, this person &ill choose a. "1(, 1($. b. "1), /./0$. c. "2), ($. d. "(, )(*$.
11.
If an individual!s utility function for coffee " x$ and cream " y$ is given by U " x, y$ = min " x, ) y$, the demand function for coffee is given by a. X 6 I 2 p x . b. X 6 I " p x 7 p y$. c. X 6 I " p x 7 (.2 p y$. d. X 6 I " p x 7 p y$2.
12.
uppose utility is given by U " x, y$ = ln x 7 ln y and p x 6 1, I 6 1(. If y must be purchased in &hole units, &hat is the maximum price this person &ould pay for that good8 a. 1. b. ). c. 1(. d. 2(.
1*.
n individual has a utility function for tennis rac#ets " x$ and tennis balls " y$ of the form U " x, y$ 6 min"* x, y$. 9is or her expenditure function is given by
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Chapter 9/Profit Maximization
b.
1 E = p x + p y÷ U . * E = " p x + * p y $ U .
c.
E = p x +
d.
E = " p x +
a.
1-.
1
p y÷ U .
* p y $ U * .
In a utility maximization :agrangian, the :agrange multiplier ; is a. the marginal utility of income. b. the additional bang for the buc# you get from spending an extra dollar on any of the goods in the utility function. c. d.
MU 1 p1
=
MU 2 p 2
=
MU n ... p n
all of the above.
1).
The indirect utility function tells you a. utility as a function of prices. b. utility as a function of prices and income. c. &hat the inverse of the utility function is. d. the optimal 4uantity of each good.
1/.
The lump sum principle says that a. lump sum taxes are the fairest &ay for governments to raise tax revenue. b. taxpayers &on!t change the bundle of goods they consume &hen they are sub
10. =hich of a. b. c. d. e. f.
the follo&ing is not a correct statement8 Indirect utility functions are homogeneous of degree 1 in the utility level. >xpenditure functions are homogeneous of degree 1 in all prices. Indirect utility functions are nondecreasing in income. ?tility functions are nondecreasing in income. ll of the above statements are correct. @oth a and d are incorrect.
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