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EC 203.01
PS: CH 6
FALL 2006
1. If preferences are quasilinear, then for very high incomes the income offer curve is a straight
line parallel to one of the axes. TRUE
2. If preferences are homothetic, then the slope of the Engel curve for any good will decrease as
income increases. FALSE
3. If income is doubled and all prices are doubled, then the demand for luxury goods will more
than double. FALSE
4. Maradona received a tape recorder as a birthday gift and is not able to return it. His utility
function is U(x, y, z) = x + z
f(y), where z is the number of tapes he buys, y is the number of
tape recorders he has, and x is the amount of money he has left to spend. f(y) = 0 if y < 1 and f(y)
= 24 if y is 1 or greater. The price of tapes is $4 and he can easily afford to buy dozens of tapes.
How many tapes will he buy?
a. 9
b. 11 c. 7
d. 13 e. 18 A
5. For m > p2, the demand functions for goods 1 and 2 are given by the equations,
–1
and
, where m is income and p1 and p2 are prices. Let the horizontal axis represent
the quantity of good 1. Let p1 = 1 and p2 = 2. Then for m > 2, the income offer curve is
a. a vertical line.
b. a horizontal line.
c. a straight line with slope 2.
d. a straight line with a slope of
.
e. None of the above. B
6. İskender’s utility function is U(x, y) = min{ 3x + 2y, 2x + 5y}, where x is the number of units of
sugar he consumes and y is the number of units of spice he consumes. He is currently consuming
12 units of sugar and 40 units of spice and he is spending all of her income.
a. Draw a graph showing his indifference curve through this point.
b. The price of spice is 1 YTL. In order for this to be his consumption bundle, what must the price
of sugar be and what must his income be?
a.His indifference curve is a broken line consisting of the outer envelope of the two lines
3x + 2y = 116 and 2x + 5y = 116. The point (12, 40) is on the line 3x + 2y = 116.
b.The price of sugar must be 1.50 YTL and his income must be 58 YTL.
7. With some services, e.g., checking accounts, phone service, or pay TV, a consumer is offered a
choice of two or more payment plans. One can either pay a high entry fee and get a low price per
unit of service or pay a low entry fee and a high price per unit of service. Suppose you have an
income of $100. There are two plans. Plan A has an entry fee of $20 with a price of $2 per unit.
Plan B has an entry fee of $40 with a price of $1 per unit for using the service. Let x be
expenditure on other goods and y be consumption of the service.
a. Write down the budget equation that you would have after you paid the entry fee for each of
the two plans.
b. If your utility function is xy, how much y would you choose in each case?
c. Which plan would you prefer? Explain.
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a. x + 2y = 80, x + y = 60.
b. 20, 30.
c. Plan B. The utility of the bundle chosen with Plan A is 20(40) = 800 and the utility from
the Plan B bundle is 30(30) = 900.
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