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Midterm Review

This document provides instructions and review questions for an intermediate microeconomics midterm exam. It is divided into four sections covering supply and demand, consumer behavior, demand, and uncertainty and consumer behavior. The exam will be open book and consist of true/false questions and 5 problems drawn randomly from a list of questions corresponding to each section.

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20 views

Midterm Review

This document provides instructions and review questions for an intermediate microeconomics midterm exam. It is divided into four sections covering supply and demand, consumer behavior, demand, and uncertainty and consumer behavior. The exam will be open book and consist of true/false questions and 5 problems drawn randomly from a list of questions corresponding to each section.

Uploaded by

gmahdaniel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Intermediate Microeconomics

Review Questions for Midterm Exam

Instructions:
• The exam will be open-book.
• Total time: 2 hours.
• There will be a true-false section and a problem-solving section, consisting of 5 problems
drawn from the following list. The numbers and functional forms may be different.

1 Chapter 2: Supply and Demand

Q1. Chapter 2, Exercise 1.


Q2. Chapter 2, Exercise 2.
Q3. Chapter 2, Exercise 3.

2 Chapter 3: Consumer Behavior

Q1: Suppose there are two goods: clothes (C) and food (F ). The price of food, PF , is 10 and
the price of clothes, PC is 7. The consumer’s income is $140.
1. Draw the budget line (assume the X-axis is F ). Label the values where the budget line
intersects the X and Y axes.
2. Suppose PF increases to 14. Draw the updated budget line.
3. True or false: every market bundle affordable under the budget in (1) is affordable under
the budget in (2).
4. True or false: a consumer with a standard utility function, after choosing the utility-
maximizing bundle, will end up with a higher utility with the budget in (2) compared
to (1).
Q2: Suppose there are two goods: apples (a) and raspberries (r). Suppose that a consumer
has a utility of the form: U (r, a) = 4r + 3a.
1. Draw the indifference curves for this utility function.
2. What is the marginal rate of substitution between raspberries and apples when the
amount consumed is r = 50 and a = 50? What about at r = 100, a = 50?
3. What type of goods are apples and raspberries for this consumer?

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Q3: A consumer whose preferences satisfy the standard assumptions is considering the market
bundle A in the figure below, which lies on indifference curve U 1.

For each of the following statements, say if it is true or false, and give a brief explanation
why:
1. A is the consumer’s optimal bundle, since the indifference curve intersects the budget
line.
2. At A, the MRS is equal to the slope of the budget line.
3. The consumer is not using all of his income at A.
4. The consumer can find another affordable point that is on a higher indifference curve
than U 1.
5. The consumer should consume more of good Y since the MRS exceeds the price ratio
at A.
Q4: A consumer has a utility function over goods x and y as follows: u(x, y) = xy 2 . The
price of each good is PX , PY and income is I.
(a) (6 pts) Find the marginal utility with respect to both goods M Ux and M Uy .
(b) (6 pts) Write down the condition for utility maximization involving the MRS and Px , Py .
(c) (10 pts) Suppose I = 12, Px = 2, and Py = 4. Find the optimal choice of x and y.
(d) (6 pts) Find the optimal demand for both goods as a function of I, Px , and Py .
Q5: Chapter 3, Exercise 5
Q6: Chapter 3, Exercise 15

2
Q7: Chapter 3, Exercise 16

3 Chapter 4: Demand

Q1: Chapter 4, Exercise 1


Q2: Chapter 4, Exercise 4
Q3: Chapter 4, Exercise 5
Q4: Chapter 4, Exercise 9
Q5: (24 pts) Suppose that the demand curve for a bridge crossing is given by Q = 50 − 4P .
(a) (8 pts) Write down the price elasticity of demand as a function of P .
(b) (8 pts) At what price is elasticity equal to −1?
(c) (4 pts) Calculate the seller’s revenue and consumer surplus at the price in part (b).
(d) (2 pts) What value of P (where P ≥ 0) would maximize consumer surplus?
(e) (2 pts) What value of P (where P ≥ 0) would maximize seller’s revenue?

4 Chapter 5: Uncertainty and Consumer Behavior

Q1: Chapter 5, Exercise 1


Q2: Chapter 5, Exercise 6
Q3: Chapter 5, Exercise 7
Q4: Alice is currently has a job that pays $60,000 a year with 100% probability. She is
considering whether to switch to a job that has two possible outcomes: (i) $80,000 with
probability p; and (ii) $25,000 with probability (1 − p). Her utility function over income is
√
u(w) = w.
(a) Write down the expected income of the risky job as a function of p.
(b) Write down the expected utility of the risky job as a function of p.
(c) What value of p will make Alice indifferent between the two jobs? (Solve for the value of
p that equates the expected utility of both jobs).
√ 1
Q5: There are two drivers: Alice and Bob, with utility functions 5w and √w+1 , respectively.
There are two possible outcomes: (i) with probability 0.1, the driver will get into an accident,
resulting in a wealth of 0. (ii) With probability 0.9, the driver will not have an accident,
resulting in a wealth of 5.
(a) (10 pts) Calculate the expected wealth, variance of wealth, and expected utility for each
driver.

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(b) (8 pts) For each driver, calculate the non-risky level of wealth that would give them the
same expected utility as in part (a).
(c) (6 pts) For each driver, say if they are risk-averse, risk-neutral, or risk-loving.

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