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Problem Set - 4

This document provides instructions for Problem Set #4 in ECON 410. It states that the problem set is due by September 16th at 11:59 pm and must be submitted through Sakai. It provides tips for submitting assignments through Sakai to avoid technical issues. It notes that students must answer 8 out of 10 multiple choice questions correctly to pass. The document then lists 10 practice questions related to consumer demand and elasticity.

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aldi
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117 views

Problem Set - 4

This document provides instructions for Problem Set #4 in ECON 410. It states that the problem set is due by September 16th at 11:59 pm and must be submitted through Sakai. It provides tips for submitting assignments through Sakai to avoid technical issues. It notes that students must answer 8 out of 10 multiple choice questions correctly to pass. The document then lists 10 practice questions related to consumer demand and elasticity.

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 #4

Directions:
1. This assignment is due by 11:59 pm on Wednesday, September 16.

2. Your answers must be submitted through Sakai. You can find “Problem Set #4” 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. Yina’s preferences over goods x and y are represented by 𝑈(𝑥, 𝑦) = 𝑥1/2 + 𝑦 1/2. What is her
demand function for good x? Let px denote the price of x, let py denote the price of y, and let I
denote income.

𝐼
a. 𝑥 = 𝑃𝑦
𝑃𝑥 (1+ )
𝑃𝑥

𝐼
b. 𝑥 = 𝑃
𝑃𝑥 (1+ 𝑥 )
𝑃𝑦

𝐼
c. 𝑥 = 1+𝑃
𝑥

𝐼𝑃
d. 𝑥 = 1+𝑃𝑥
𝑥

(See Besanko 5.6 and 5.8 and Demand and Elasticity Practice Problem #1.)

2. Suppose Jay’s utility function is given by U(x,y) = min(3x,4y). Let px denote the price of x, let py
denote the price of y, and let I denote income. The equation for his demand function for good y is
𝐼
a. 𝑦 = 4
𝑝𝑥 + 𝑝𝑦
3

𝐼
b. 𝑦 = 3
𝑝 + 𝑝𝑦
4 𝑥

𝐼
c. 𝑦 = 4
𝑝𝑥 + 𝑝𝑦
3

𝐼
d. 𝑦 = 3
𝑝𝑥 + 𝑝𝑦
4

(See Besanko 5.7 and Demand and Elasticity Practice Problem #2.)
3. Katie’s utility function is 𝑈(𝑥, 𝑦) = 2ln (𝑥) + 𝑦. What must be true for Katie to be at an interior
solution?
𝐼
a. 𝑃𝑦 < 2
𝑃𝑥
b. 𝑃𝑦 < 2
𝐼
c. 𝑃𝑥 < 𝑃
𝑦

𝑃𝑦
d. 𝑃𝑥 < 2

(See Besanko 5.16 and Demand and Elasticity Practice Problem #3.)

4. Through some fancy Lagrangian techniques, you find an individual’s demand function for good
3 1/2
x to be: 𝑥 = 𝑃 2 − 𝑃𝑦 𝑃𝑥 . Consider the 4 statements (a-d) below. Which of these statements, if
𝑥 𝑃𝑦

any, is not necessarily true? Assume an interior solution.


a. As the price of good y goes up, this individual will consume less of good x.
b. The demand curve for good x is downward sloping.
c. The Engel curve for good x is vertical.
d. The price consumption curve (as the price of x changes) is downward sloping.
e. All of the above statements are necessarily true.

(See Demand and Elasticity Practice Problem #4.)

5. Assume an individual has preferences represented by the utility function 𝑈(𝑥, 𝑦) = 𝑥𝑦 + 𝑦.


Which of the following statements is necessarily true, assuming an interior solution?
a. The price consumption curve (as the price of x changes) slopes downward.
b. The income consumption curve slopes downward.
c. Cross-price elasticity of demand for good x with respect to the price of y is negative.
d. Price elasticity of demand for good y is positive.
e. All of the above statements are false.

(See Besanko 5.6 and 5.16 and Demand and Elasticity Practice Problem #5.)
6. Taylor’s preferences for goods x and y are given by the utility 𝑈(𝑋, 𝑌) = 𝑋1/3 𝑌1/2 . Use
elasticity of demand to predict what will happen to her consumption of good x if the price of
good x decreases by 12%.

a. 0

b. + 4%

c. + 6%

d. + 12%

e. + 24%

(See Demand and Elasticity Practice Problems #6 and 7.)

7. David has a quasi-linear utility function of the form U(x, y) = √x + y. Which describes his
income consumption curve, assuming an interior solution?
a. upward sloping
b. downward sloping
c. vertical
d. horizontal
e. undefined

(See Demand and Elasticity Practice Problem #8.)


8. Assume an individual has preferences of the form 𝑈(𝑥, 𝑦) = (3𝑥 − 2)1/2 𝑦 1/2. What is his
cross-price elasticity of demand for good y with respect to the price of good x? Assume the
individual is currently consuming both goods.
a. 𝜀𝑦,𝑥 = 0
1
b. 𝜀𝑦,𝑥 = − 3𝑃
𝑦

𝑃𝑥
c. 𝜀𝑦,𝑥 = − 3𝐼
−𝑃𝑥
2

𝑃
d. 𝜀𝑦,𝑥 = − 3𝑃𝑥
𝑦

9𝑃𝑦 1
e. 𝜀𝑦,𝑥 = (4𝑃 ) 𝐼 9𝑃𝑦
𝑥 ( − )
𝑝𝑦 4𝑃𝑥

(See Demand and Elasticity Practice Problems #6 and 7.)

9. Consider the truthfulness of the following statement.


I. If the price consumption curve (as the price of good x changes) is vertical, then the price
elasticity of demand for good x is zero.
II. If the price consumption curve (as the price of good x changes) is vertical, then the cross-
price elasticity of demand for good y with respect to the price of good x is necessarily
positive.

a. Only statement I is true.


b. Only statement II is true.
c. Both statements I and II are true.
d. Neither statement is true.

(See Besanko 5.4 and Demand and Elasticity Practice Problems #9 and 10.)
10. Consider the truthfulness of the following statement.

I. If the income consumption curve is downward sloping, then good y is necessarily an


inferior good.
II. If the price consumption curve (as the price of good x changes) is upward sloping, the
demand curve for good x is necessarily downward sloping.

a. Only statement I is true.


b. Only statement II is true.
c. Both statements I and II are true.
d. Neither statement is true.

(See Besanko 5.4 and Demand and Elasticity Practice Problems #9 and 10.)

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