1. Chang and Haipeng consume only two goods X and Y.

They trade only with each other and there is

2. Chang has the utility function 𝑈(𝑏, 𝑤) = 5𝑏 + 15𝑤 and Haipeng has the utility function 𝑈(𝑏, 𝑤) =
𝑏𝑤 where b is the number of books consumed per month and w is bottles of wine consumed per month.
If we draw an Edgeworth box with books on the horizontal axis and wine on the vertical axis and if we
measure Chang’s consumptions from the lower left corner of the box, then the contract curve contains:
A. a straight line running from the upper right corner of the box to the lower left.
B. a straight line with slope 1/3 passing through the lower left corner of the box.
C. a straight line with slope 1/3 passing through the upper right corner of the box.
D. a curve that gets steeper as you move from left to right.
E. a curve that gets flatter as you move from left to right.
H

C
The answer is not complete, the contract curve should be CM-MH.
3. Every consumer has a red-money income and a blue-money income and each commodity has a red
price and a blue price. You can buy a good by paying for it either with blue money at the blue price, or
with red money at the red price. Chang has 30 units of red money to spend and 48 units of blue money
to spend. The red price of ambrosia is 3 and the blue price of ambrosia is 8. The red price of bubblegum
is 1 and the blue price of bubblegum is 2. If ambrosia is on the horizontal axis, and bubblegum on the
vertical, axis, then Chang’s budget set is bounded:
A. by two line segments one running from (0, 54) to (6, 30) and the other running from (6, 30) to (16, 0).
B. by two line segments, one running from (0, 54) to (10, 24) and another running from (10, 24) to (16,
0).
C. by two line segments, one running from (0, 30) to (10, 24) and the other running from (10, 24) to (40,
0).
D. a vertical line segment and a horizontal line segment, intersecting at (10, 24).
E. a vertical line segment and a horizontal line segment, intersecting at (6, 30).
ambrosia bubblegum
Red money 10 30
Blue money 6 24
24/6 > 30/10
Bubblegum is relatively cheaper in blue money, i.e., if you want to buy some ambrosia and bubblegum,
you should first use blue money to buy bubblegum until you have no blue money. (10, 24) is the kink
point where you start to use red money to buy bubblegum.

4. Last year a pestilential fungus ravaged the cocoa fields. The price of chocolate has risen abruptly to
$1 per ounce. The government is considering emergency measures to aid suffering chocolate addicts.
One plan being considered is the Chocolate Relief Plan (CRP). This plan would set a price ceiling of $.80
per ounce on chocolate. This would cause a shortage, so the CRP will limit consumption to no more than
10 ounces of chocolate per person per week. At $.80 per ounce, enough chocolate would be produced for
everyone to have 10 ounces. Chang buys less than 10 ounces per week at $1 per ounce, but would buy
more than 10 ounces if the price dropped to $.80.
A. Chang is definitely better off without the CRP.
B. Chang is definitely better off with the CRP.
C. Chang is better off without the CRP if $1 is the competitive equilibrium price without the CRP.
D. Chang is better off with CRP only if the industry is monopolized and the price exceeds marginal cost
in the absence of the CRP.
E. None of the above.
It is implicitly assumed that more money and more chocolate are better.

5. Robinson Crusoe has exactly 10 hours per day to spend gathering coconuts or catching fish. He can
catch 3 fish per hour or he can pick 9 coconuts per hour. His utility function is 𝑈(𝐹, 𝐶) = 𝐹𝐶, where 𝐹
is his consumption of fish and 𝐶 is his consumption of coconuts. If he allocates his time in the best
possible way between catching fish and picking coconuts, his consumption will be the same as it would
be if he could buy fish and coconuts in a competitive market where the price of coconuts is 1. Under the
competitive equilibrium, what is his income and the price of fish?
A. His income is 90, and the price of fish is 3.
B. His income is 30, and the price of fish is 3.
C. His income is 120 and the price of fish is 3.
D. His income is 120 and the price of fish is 0.33.
E. His income is 60 and the price of fish is 0.33.

1
6. Yunwen loves apples and hates bananas. Her utility function is 𝑈(𝑎, 𝑏) = 𝑎 − 4 𝑏 2 , where 𝑎 is the
number of apples she consumes and 𝑏 is the number of bananas she consumes. Haipeng likes both

apples and bananas. His utility function is 𝑈(𝑎, 𝑏) = 𝑎 + 2√𝑏. Yunwen has an initial endowment of no
apples and 8 bananas. Haipeng has an initial endowment of 16 apples and 8 bananas. In competitive
equilibrium, how many bananas and apples will Yunwen consume? How many bananas and apples will
Haipeng consume? If Haipeng is consuming this number of bananas and apples, what is his marginal
utility for bananas and marginal utility for apples?
The correct answer is on the last page. As the following solution comes from the workout I gave before
the quiz. You will get the credit with either the following answer or the correct answer.
The first preference is not monotonic, not well-behaved as well. However the competitive equilibrium
still exist in this exercise. It is easy to see that the Pareto efficient allocation must be 𝑏𝑦 = 0. 𝑏ℎ = 𝑏 −
𝑏𝑦 = 16 . Competitive equilibrium must be Pareto efficient. Using the marginal utility of Haipeng
 1
𝑀𝑈𝐵 = = 1/4 , 𝑀𝑈𝐴 = 1 , we know that 𝑝𝑎 = 4𝑝𝑏 . Yunwen will use all the endowment to
√𝑏ℎ

consume 2 apples.
Haipeng will consume 16 bananas and 14 apples and Yunwen will consume 0 bananas and 2 apples.
Haipeng’s marginal utility for bananas will be 1/4 and his marginal utility for apples will be 1.

7. Robinson Crusoe has decided that he will spend exactly 8 hours a day gathering food. He can either
spend this time gathering coconuts (𝐶) or catching fish (𝐹). He can catch 1 fish per hour and he can
gather 2 coconuts per hour.
(1) Write an equation for the line segment that is Robinson’s production possibility frontier.
𝐹 + 𝐶/2 = 8.
(2) Robinson’s utility function is 𝑈(𝐹, 𝐶) = 𝐹𝐶, where 𝐹 is his daily fish consumption and C is his
daily coconut consumption. How many fish will Robinson choose to catch per day? How many coconuts
will he collect?
4, 8.
(3) One day, while walking along the beach, Robinson Crusoe saw a canoe in the water. In the canoe was
a native of a nearby island. The native told Robinson that on his island there were 100 people and that
they all lived on fish and coconuts. The native said that on his island, it takes 2 hours to catch a fish and
1 hour to find a coconut. The native said that there was a competitive economy on his island and that fish
were the numeraire. The price of coconuts on the neighboring island must have been $ . The native
offered to trade with Crusoe at these prices. “I will trade you either fish for coconuts or coconuts for fish
at the exchange rate of 2 coconuts for a fish,” said he. “But you will have to give me 1 fish as payment
for rowing over to your island.” Would Robinson gain by trading with him?
0.5, No.