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Problem Set - 2

This document provides instructions for Problem Set #2 in ECON 410. It states that the problem set is due by August 30th and must be submitted through Sakai. It also lists several technical requirements for submission and recommends using Firefox as other browsers may have errors. The problem set contains 10 multiple choice questions testing concepts related to preferences, indifference curves, and marginal rate of substitution.

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aldi
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88 views

Problem Set - 2

This document provides instructions for Problem Set #2 in ECON 410. It states that the problem set is due by August 30th and must be submitted through Sakai. It also lists several technical requirements for submission and recommends using Firefox as other browsers may have errors. The problem set contains 10 multiple choice questions testing concepts related to preferences, indifference curves, and marginal rate of substitution.

Uploaded by

aldi
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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ECON 410: Problem Set #2

Directions:
1. This assignment is due by 11:59 pm on Sunday, August 30.

2. Your answers must be submitted through Sakai. You can find “Problem Set #2” under Tests
& Quizzes on Sakai.

3. It is your responsibility to allow enough time before submission to safeguard against


technical glitches. Glitches can and do happen and are not valid excuses for missing a deadline!
To protect your submission, be sure to
• click save before you submit.
• verify that you received an email confirming your submission.
• not have multiple browser windows or tabs open!
• use the within-test navigation options, not your web browser’s forward and back options.
• use a computer, not a mobile device.
• use Firefox as errors have been reported with other browsers.

4. For each question, select the one best answer. Answer 8 out of 10 questions correctly to pass.
1. Carol likes fruit but dislikes vegetables. For every additional vegetable you make her eat, she
requires larger and larger quantities of fruit to maintain a constant level of satisfaction. The
following indifference map could represent Carol’s preferences, where U1 < U2 < U3.
IC3 (U=U3)
vegetables
IC2 (U=U2)
IC1 (U=U1)

fruit

a. True
b. False
(See Besanko 3.7 and Preferences Practice Problem #1.)

2. I don’t like turbulence (measured in bumps). I don’t like running when I first start to run, but
once I run long enough I start to like it. Which of the following could represent my
indifference curve for running and turbulence? For each graph assume turbulence is on
the horizontal axis and running is on the vertical axis.

Graph A Graph B Graph C Graph D

a. Graph A
b. Graph B
c. Graph C
d. Graph D

(See Preferences Practice Problem #1.)


3. An individual has preferences represented by the utility function U(x,y) = (x1/2 + y1/2)2.
Which of the following statements concerning her MRS is false?
a. If the individual has 4 units of x and 36 units of y, she would be willing to trade a
maximum of 1/3 units of y to get 1 additional unit of x.
b. If the individual has 8 units of x and 2 units of y, the MRS of x for y at that point would
be 1/2.
c. If the individual has 16 units of x and 4 units of y, she would be willing to trade a
maximum of 2 units of x to get 1 additional unit of y.
d. If the individual has 10 units of x and 250 units of y, she would be willing to trade a
maximum of 5 units of y to get 1 additional unit of x.

(See Preferences Practice Problem #2.)

4. Consider the following four bundles of Food and Clothing:

Bundle Food Clothing


A 5 8
B 15 6
C 10 7
D 8 10

Preferences are complete, transitive, monotonic and convex. If bundles A and B are on the
same indifference curve, then:
a. C is preferred to both A and B.
b. B is preferred to D.
c. C is on the same indifference curve as A and B.
d. A is preferred to B.
e. None of the above are correct.

(See Preferences Practice Problem #3.)


5. George dislikes cigars (X). However, each additional cigar decreases his utility by less than
the last cigar. On the other hand, George likes cigarettes (Y) and is an addicted smoker for
whom each additional cigarette is even better than the last. Which of the following utility
functions could represent his preferences?
1
a. 𝑈 = −𝑋 2 + 𝑌1/2

b. 𝑈 = −𝑋 2 + 𝑌 2

𝑌2
c. 𝑈 = 𝑋 2

𝑌 1/2
d. 𝑈 = 𝑋 1/2

(See Preferences Practice Problem #5.)

6. Which of the following statements about convex preferences is/are TRUE?


a. Consumers are willing to give up decreasing amounts of Good Y to get each additional
unit of Good X.
b. Consumers need to be compensated with increasing amounts of Good X to be willing to
give up each additional unit of Good Y.
c. A and B are both true.

(See Preferences Practice Problem #4.)

7. An individual is willing to forgo increasing amounts of good Y for each additional unit of
good X. Which of the following utility functions is consistent with these preferences?

a. 𝑈(𝑋, 𝑌) = 𝑋 + 𝑌 2
b. 𝑈(𝑋, 𝑌) = (𝑋1/2 + 𝑌1/2 )2
𝑌2
c. 𝑈(𝑋, 𝑌) = 𝑋 2

d. U(X,Y) = X1/2 + 2Y

(See Preferences Practice Problem #4.)


8. An individual’s preferences are represented by the utility function U(x, y) = 4xy + x. Which
of the following statements is false?

a. The marginal utility of x increases as x increases, holding y constant.


b. Preferences are monotonic in both goods.
c. The indifference curves slope downward at a decreasing rate.
d. The marginal rate of substitution of x for y increases as y increases, holding x constant.
e. The consumer is willing to give up decreasing amounts of good y for each additional unit
of good x in order to remain as well off.

(See Preferences Practice Problem #6.)

9. Laura’s preferences over pounds of fruit (F) and pounds of vegetables (V) are represented by
U(F,V) =ln(F) + 4V1/2. According to her MRS, what’s the maximum amount of fruit she
would be willing to give up to get one more pound of vegetables, if she currently has 4
pounds of vegetables and 8 pounds of fruit?
a. 1/2 of a pound of fruit
b. 2 pounds of fruit
c. 1/8 of a pound of fruit
d. 8 pounds of fruit
e. 1 pound of fruit
(See Preferences Practice Problem #2.)

1
10. Rachel’s preferences can be described by 𝑈(𝑋, 𝑌) = ln (𝑋 2 ) − 2 𝑌 2 . Rachel likes X and

likes it _________ the more she consumes. Rachel dislikes Y and dislikes it _________ the
more she consumes. Her indifference curves slope _________ at _________ rate.
a. less and less; more and more; upward; an increasing
b. more and more; less and less; upward; an increasing
c. less and less; more and more; downward; an increasing
d. more and more; less and less; upward; a decreasing
e. less and less; more and more; upward; a decreasing
(See Preferences Practice Problem #7.)

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