Question 1

You have $64 to spend on fish (F) and chips (C). Suppose the price per unit of fish (Pf) is $8 and the price of chips (Pc) is $2. Your utility function for fish and chips is given asC. How many units of C and F should you buy to exhaust all income and maximize utility?
First note that to maximize utility, you have to be at equilibrium. This means, the following condition has to be satisfied:
  It is better to write this as:
  Now substitute the corresponding entities in the above expression:
  Cancelling the 2s in the denominator and cross-multiplying we get
C = 4 F
Now the second aspect of this is your income which is $64, which has to be spent on F and C. So your budget constraint should satisfy this condition:
64 = C Pc + F Pf or
64 = C 2 + 8 F and now from the previous condition we have
 64 = (4 F) 2 + 8 F or
F = 4 units
C = 16 units and total utility is

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Question 2

Robinson pays $100 for tickets to see his favorite sports team play. With 10 minutes left in the game, his team is losing heavily and has no chance of winning the game. Robinson chooses to stay until the end of game because he wants to get the full value for his admission price. As an economist, you should advise Robinson to:

Accepted Answer

A)  stay until the end of the game since his intuition is correct 
B)  stay until the end of the game since he might be heckled on the way out 
C)  leave the game now if his marginal benefit of leaving is greater than marginal cost, since the admission price is a sunk cost 
D)  leave the game now since the line to exit the stadium is shorter now

Question 3

Assume the quantity of apples is measured on the horizontal axis and the quantity of oranges is measured on the vertical axis. If the budget line rotates upward, while keeping the same horizontal intercept, then:

Accepted Answer

A)  the price of apples decreased. 
B)  the price of oranges decreased. 
C)  the available income increased. 
D)  the price of oranges increased

Question 4

Ali inherits $10,000 from his great-great aunt in 2008. His great-great aunt's will requires that Ali spend the money before December 31, 2009. He can spend the money on two consumption goods: consumption in 2008 or consumption in 2009. This is Ali's only source of money. The interest rate on loans or savings is ten percent.
(a) How much could Ali spend in 2008 if he only consumes in 2008? How much could Ali spend in 2005 if he only consumes in 2009?
(b) What is the opportunity cost of consuming $1.00 in 2008, in terms of forgone consumption in 2009? Draw Ali's budget constraint and optimal consumption bundle. Please put 2008 consumption on the x-axis.
(c) Ali decides to spend 6000 dollars on consumption in 2008 and 4400 dollars. Show this optimal consumption bundle using a budget constraint and indifference curve diagram.

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Question 5

Assume that the quantity of CDs is measured on the horizontal axis, while the quantity of movie tickets is measured on the vertical axis. If available income decreases, then the new budget line:

Accepted Answer

A)  will have a smaller horizontal intercept, while keeping the same vertical intercept. 
B)  will have a smaller vertical intercept, while keeping the same horizontal intercept. 
C)  will have a smaller vertical and horizontal intercept. 
D)  will have a bigger vertical and horizontal intercept.

Question 6

A budget line:

Accepted Answer

A)  shows all the combinations of goods that yield the same (utility) level of satisfaction. 
B)  shows all the combinations of goods that require the same total expenditure. 
C)  has a slope that depends on consumer's income 
D)  slopes upwards

Question 7

Assume the quantity of apples is measured on the horizontal axis and the quantity of oranges is measured on the vertical axis. If Andy likes both apples and oranges, then his Marginal Rate of Substitution (i.e. the slope of an indifference curve) along the indifference curve indicates:

Accepted Answer

A)  how many oranges he is willing to give up in order to obtain one more apple. 
B)  how many additional oranges he wants in order to give up two apples. 
C)  how many oranges he is willing to give up in order to get rid of one apple. 
D)  how many apples he is willing to give up in order to get rid of one orange.

Question 8

Assume Joseph spends his entire income on X and Y, and his indifference curves have the usual convex shape. If Joseph maximizes his utility, then:

Accepted Answer

A)  he spends his entire available income. 
B)  there are other bundles that are preferred at the current price ratio. 
C)  the slope of his indifference curve is greater than the slope of his budget line. 
D)  the slope of his indifference curve is smaller than the slope of his budget line.

Question 9

What is the relationship between the slope of the budget line to the notion of opportunity cost?

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Question 10

Suppose that canned soup is inferior. This means that when:

Accepted Answer

A)  When income rises, more soup will be bought 
B)  When income rises, less soup will be bought 
C)  When income falls, less soup will be bought 
D)  You will never consume canned soup because of its low quality

Question 11

Jim Range has to choose between buying more soda or more pasta for the week. He has a fixed income and he knows the prices of both products. Using indifference curves and budget constraint lines, illustrate the amount of soda and pasta that Jim will purchase. When he gets to the store, he finds the price of soda has fallen dramatically. How does this change his optimal purchase? Can a general rule of human behavior be developed from this graphical example?

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Question 12

Contrast the "Good Citizen Model" with the "Economic Model" to explain the reason why people engage in charitable behavior.

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Question 13

The demand for normal goods obeys the law of demand because of:

Accepted Answer

A)  the substitution effect. 
B)  the income effect. 
C)  risk-aversion. 
D)  both the substitution and income effects.

Question 14

You purchase both potatoes and gasoline regularly. Your income increases, and you purchase more gasoline. This means that:

Accepted Answer

A)  Gasoline has a negative substitution effect 
B)  Potatoes are normal goods 
C)  Gasoline is inferior 
D)  Gasoline is normal

Question 15

Assume MACROSOFT is planning to develop and sell a new word processor. It estimates that R&D expenses will amount to $300,000 for this new software, while it will have to invest an additional $150,000 to advertise and distribute the new product. If MACROSOFT's managers are risk-neutral, they will undertake this project if the expected revenues from the sales of the new software are:

Accepted Answer

A)  at least $150,000. 
B)  No return is necessary in the short term. 
C)  at least $300,000. 
D)  at least $450,000.

Question 16

Robert only consumes X and Y, and his indifference curves have the usual convex shape. Consider the consumption bundles (3, 9), (6, 6), and (9, 3) (hint: they lie on a straight line). If Robert is indifferent between (3, 9) and (9, 3), then:

Accepted Answer

A)  he prefers (3, 9) over (6, 6). 
B)  he prefers (9, 3) over (6, 6). 
C)  he prefers (6, 6) over both (3, 9) and (9, 3). 
D)  he prefers (6,6) over (3,9) but not over (9,3).

Question 17

Indifference curves are downward sloping when:

Accepted Answer

A)  both items are goods. 
B)  one item is a good and the other item is a bad. 
C)  we compare risk and return. 
D)  both items are expensive

Question 18

What does the tangency between an indifference curve and the budget line determine?

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Question 19

It is commonly believed that the best ways to motivate an employee are (1) to improve the quality of the workplace and (2) to make the employee feel like he/she is part of the company. How would an economist analyze these statements?

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Question 20

A risk-averse agent:

Accepted Answer

A)  only cares about expected payoff. 
B)  cares about expected payoff, as well as the variability of a payoff. 
C)  only cares about the variability of a payoff. 
D)  always prefers a certain payoff to a risky one.

Exam 2: Economists View of Behavior