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F O I Rosi: University of Toronto, ECO 204 Summer 2010
F O I Rosi: University of Toronto, ECO 204 Summer 2010
ECO204Summer2010.AjazHussain
Test2
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Question Points Score
1 50
2 50
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Question1
Considera2periodeconomywithasinglegood(say,corn).Aconsumerreceivesrealincome
1
,
2
(in
cornunits)atthebeginningofI = 1, 2 respectively.ThepricelevelatI = 1isP
1
= 1andtheprice
levelatI = 2isP
2
.Ineachperiod, consumercanborroworlendcornatnominalinterestratei. the
Assumethattherealinterestrate u.
(a)[5points]Sketchsomeindifferencecurvesinthegraphbelow.Showallrelevantcalculationsneeded
tosketchthecurvesbelow.
C
2
C
1
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(b)[5points]DoesthisconsumerhavestrictlyconvexpreferencesoverC
1
andC
2
?Giveabrief
explanationandifneeded,usethegraphbelow.
thoutpriorpermission
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C
2
C
1
(c)[25points]SolvefortheoptimalchoiceofC
1
andC
2
.Showallcalculationsbelow.Hint:Whatdothe
indifferencecurvestellyou?
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(d)[5points]Howmuchwillthisconsumersave(borrow)inI = 1 andI = 2?WhathappenstoS
1
and
S
2
whennominalinterestratesrise?Showallcalculationsbelow.
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(e)[5points]WhatistheelasticityofconsumptioninI = 1 withrespecttotheFutureValueIncome
(FI)?Showallcalculationsbelow.
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(f) [5 points] What is the impact on the consumers utility from a 1% income tax on her present value
income(PI)?Showallcalculationsbelow.
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Question2
Aconsumerwithincome$ > u hasthefollowingutilityfunctionovertheexpenditureongood1
($E
1
),good2(
2
),andsavings($S):
u = E
1
u
2
[
S
y
.
(a)[25points]Solvefortheoptimal$E
1
,
2
and$S.Showallcalculationsandstateanyassumptions
below.
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(b)[5points]Willtheconsumeralwaysconsumestrictlypositiveamountsofgoods1and2?Showall
calculationsbelow.
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(c)[5points]Calculateandinterprettheincomeandpriceelasticitiesofgood1.Showallcalculations
below.
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(d)[5points]Calculateandinterprettheincomeelasticityofsavings($S).Showallcalculationsbelow.
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(e)[5points]Trueorfalse:Moremoney,morehappiness?Thatis,willhigherincomemakethe
consumerhappier?Showallcalculationsbelow.
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(f)[5points]Supposetheconsumerissavingthemaximumallowableamount.Whatistheimpacton
herutilityfroma(small)quantitytaxongood1?Showallcalculationsbelow.
TheEnd
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