MIDTERM EXAMINATION II

        Intermediate Microeconomics
        (ECON 520)

October 19, 1998        Professor D. Weisman

Instructions: There are two parts to this examination weighted 50 points each. Please 
write legibly and think carefully about your answers. You may find that graphical 
and/or mathematical analysis will assist you in answering some of these questions. 
Good Luck!

Part I.  Multiple Choice (50 points). Please indicate your answers on the 
standardized answer sheet provided.

1.      A consumer prefers market basket A to market basket B, and prefers market 
basket B to market basket C. Therefore, A is preferred to C. The assumption 
that leads to this conclusion is:
a.      transitivity.
b.      completeness.
c.      all goods are good.
d.      diminishing MRS.
e.      assumption of rationality.

2.      Typical indifference curves are:
a.      convex to the origin.
b.      are characterized by a diminishing marginal rate of substitution.
c.      are characterized by a constant marginal rate of substitution.
d.      a. and b. 
e.      none of the above.

3.      Consider the following three market baskets:

Food    Clothing
A       15      18
B       13      19
C       14      17

If baskets A and B are on the same indifference curve and if preferences satisfy 
all four of the usual assumptions:
a.      A is preferred to C.
b.      B is preferred to C.
c.      both (a) and (b) are correct.
d.      none of the above.


4.      Mikey has a utility function given by U = 22 min {C, M} where C is cereal and 
M is milk. Cereal costs 4 cents per unit and milk costs 6 cents per unit. If Mikey 
has income of $8 then to maximize utility Mikey purchases
a.      40 units each of cereal and milk.
b.      80 units each of cereal and milk.
c.      40 units of cereal and 80 units of milk.
d.      100 units each of cereal and milk.

5.      A curve that represents all combinations of market baskets that provide the same 
level of utility to a consumer is called:
a.      a budget line.
b.      a demand curve.
c.      an indifference curve 
d.      a consumers= surplus curve. 
e.      none of the above.  

6.      If Jill=s MRS of popcorn for candy is 2 (popcorn is on the horizontal axis), Jill 
would willingly give up:
a.      2, but no more than 2, units of popcorn for an additional unit of candy.
b.      2, but no more than 2, units of candy for an additional unit of popcorn.
c.      1, but no more than 1, unit of candy for an additional 2 units of popcorn.
d.      2, but no more than 2, units of popcorn for an additional 2 units of candy.

7.      John=s utility function is given by U = 2X + 2Y. If John consumes only X in 
equilibrium then it follows that, 
a.      Px > Py
b.      Px < Py
c.      Px = Py
d.      b. or c. 
e.      none of the above are necessarily true. 

8.      If prices and income in a two-good society double, what will happen to the 
budget line?
a.      The intercepts of the budget line will increase.
b.      The intercepts of the budget line will decrease.
c.      The slope of the budget line may either increase or decrease.
d.      There is insufficient information to determine the effect on the budget 
line.
e.      There will be no effect on the budget line. 

9.      Dagwood=s utility function for beers (B) and pizzas (P) is given by 
U = 4B$P. What is Dagwood's marginal utility of pizza when 6 beers are
consumed?
a.      24
b.      6
c.      0
d.      2/3

e.      This cannot be determined from the information provided. 

10.     The government chooses to subsidize the price of telephone service because
a.      telephone service is characterized by a snob effect.
b.      telephone service is an inferior good.
c.      subscription to the telephone network generates a positive externality.
d.      subscription to the telephone network generates a negative externality. 
e.      none of the above.  

11.     Which of the following is least likely to represent an actual demand curve. 
a.      Q = 100 - 2P
b.      Q = 120 - 3P + 2I
c.      Q = 100 + 3P + 2I.
d.      Q = 200/(3P + I).
e.      Q = 100 - 3P - 3I.

12      John has 2 goods in his consumption bundle, beer and pizza. Suppose that the 
price of pizza falls. The substitution effect results in increased pizza 
consumption of 4 units. The income effect results in decreased consumption of 
pizza by 2 units. 
a.      Pizza is a normal good.
b.      Pizza is an inferior good, but not a Giffen good. 
c.      Pizza is a Giffen good. 
d.      a. or b. 
e.      none of the above is necessarily true.          

13.     Suppose that Jasper=s utility function for Videos (V) and Movies (M) is given by 
U = V + M. Suppose that Jasper is currently in consumer equilibrium. It follows 
that a reduction in the price of videos will lead to 
a.      a decreased level of utility for Jasper.
b.      an increased level of utility for Jasper. 
c.      no change in Jasper=s level of utility. 
d.      a. or c.  
e.      b. or c.

14.     Suppose that Beer (B) and Pizza (P) are complements and normal goods. 
Following standard notation, let Pp and PB denote the price of pizza and beer, 
respectively and let I denote income. Which of the following demand functions 
reflect these properties. 
a.      P = I/[2Pp].
b.      P = 10/I[Pp + 4PB].
c.      P = 10I/[Pp + 4PB].
d.      a. and b. 
e.      none of the above.       


15.     Carols utility for Beer (B) and Pizza is given by U = 10B$P. Suppose that Carol 
is currently exhausting her income on B and P and consuming a combination of 
B and P such that MUB/PB > MUP/PP. Carol can increase her utility by 
a.      increasing B and decreasing P in her consumption bundle. 
b.      decreasing B and increasing P in her consumption bundle.
c.      continuing to consume the current amounts of B and P. 
d.      decreasing B and decreasing P in her consumption bundle. 
e.      none of the above.   


Part II. Problems (50 points). Answer both questions. The point values are indicated 
after each question. Show all of your work to receive partial credit. Please write legibly 
and be precise with your answers. 

1.      Jill=s utility function is given by U = 10 min {B, 2P}, where B represents the 
number of beers and P represents the number of pizzas.

a)      Draw a representative indifference map for this utility function. (4)

b)      Suppose that I = $120, Pp = 4 and  PB = 1. Find the values of B and P that 
arise in consumer equilibrium. What is the total level of utility generated 
at this consumer equilibrium? (9)

c)      Derive Jill=s general demand function for pizza (P) given I, Pp, and PB. (6)

d)      Given the demand function you derived in part c), determine whether P 
and B are normal or inferior goods and whether they are complements, 
substitutes or independent goods. Also, using the prices and income levels 
in part b) determine how Jill=s consumption of pizza will change as result 
of a 1 dollar increase in income (i.e. from I = $120 to I = $121). (6) 


2.      Write down the equation of a utility function and construct an indifference map 
that corresponds to each of the following cases.

a)      Carol is always willing to give up 2 beers in exchange for 1 additional 
pizza no matter how many pizzas and beers she has in her consumption 
bundle (i.e., MRSP-B = 2). When she has 4 beers and 2 pizzas, her total 
utility is 16. (8)


b)      Bob always consumes beer and pizza in fixed proportions. Specifically, 
if Bob has 1 pizza, he consumes precisely 2 beers and additional beers 
represent no additional utility for Bob. Similarly, if Bob has 2 beers, he 
consumes precisely 1 pizza and additional pizzas represent no additional 
utility for Bob. In addition, when Bob has 4 pizzas and 10 beers, his 
utility is 40. (8)

c)      Kathy loves pizza and is neutral toward beer (i.e., she neither likes nor 
dislikes beer). She derives 10 units of satisfaction from each pizza she 
consumes. (8)


3