UCLA

Economics 11 - Spring 2020

Professor Goncalves
Midterm 1, Version 1

NAME: ID:

TA:

Part I: Multiple Choice Questions:

1. Mariah has constant MRS of cake for pie of 2. In other words, she would take 2 pieces
of pie in exchange for a piece of cake (can also think of cake on the x-axis). The price
of pie is $3 a piece, cake is $2 a piece. If Mariah has $6, how many pieces of cake does
she buy?

(a) 0
(b) 1
(c) 2
(d) 3

2. Suppose that you have utility function U (x, y) = x1/3 y 2/3 . What happens to the share
of income spent on each good ( pxI x , pyI y ) when the price of x increases?

(a) Share spent on x increases

(b) Share spent on y increases
(c) Both shares stay the same
(d) Both shares decrease
(e) Not enough information

3. Suppose that you have utility function U (x, y) = min(x, 2y). What happens to the
share of income spent on each good ( pxI x , pyI y ) when the price of x increases?

(a) Share spent on x increases

(b) Share spent on y increases

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 (c) Both shares stay the same
(d) Both shares decrease
(e) Not enough information

4. Let U (x, y) = x2 + y 2 and prices be px , py , and income I. What are demand for x and
y if px > py ? Hint: draw an indifference curve

(a) (x∗ , y ∗ ) = ( pIx , 0)

(b) (x∗ , y ∗ ) = (0, pIy )
py
(c) (x∗ , y ∗ ) = ( p2p+p
x
2 I, p2 +p2 I)
x y x y

∗ ∗
(d) (x , y ) = ( 2pI x , 2pI y )

5. Philip is indifferent between bundles (1, 3) and (3, 1). If he has diminishing MRS, which
bundle does he prefer to these?

(a) (0, 4)
(b) (2, 2)
(c) (4, 0)
(d) Not enough information.

6. Thomas is indifferent between bundles (1, 3) and (2, 2). Which bundle do we know with
certainty he prefers to these?

(a) (0, 4)
(b) (2.5, 1.5)
(c) (2.5, 2.5)
(d) (3, 0)

7. Which of the following utility functions does not represent the same preferences as
U (x, y) = x1/2 y 1/2 ?

(a) U (x, y) = ln(x) + ln(y)

(b) U (x, y) = ln(x · y)
1/2 +y 1/2
(c) U (x, y) = ex
(d) U (x, y) = xy

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 8. Every week, Jane spends all her money on a mix of coffee and tea. At her current
consumption, her MRS of tea for coffee is 2. That is, she is willing to give up 2 cups of
coffee for 1 cup of tea (can also think of tea on the x-axis). Suppose that the price for
a cup of tea is $5, and the price of a cup of coffee is $2. In order to increase her utility,
Jane should:

(a) Buy more tea and less coffee

(b) Buy more coffee and less tea
(c) Continue with current bundle
(d) Not enough information

9. If U (x, y) = ln(x) + 2 ln(y), the bundle (x, y) = (2, 1) provides the same utility as:

(a) (2, 2)
√
(b) ( 2, 2)
√
(c) (1, 2)
(d) (1, 2)

10. Which of these functions is not homothetic?

(a) U (x, y) = min{x, 2y}

(b) U (x, y) = ln(x) + 2 ln(y)
√
(c) U (x, y) = x + 2 y
√ √
(d) U (x, y) = 2 x + y

11. What is the MRS of U (x, y) = x2 y 3 ?

(a) M RS = 2y/3x
(b) M RS = 2x/3y
(c) M RS = 3y/2x
(d) M RS = 3x/2y

12. Isaac has utility over goods x and y. His consumption of x is αI/p2x . What is his
consumption of y?

(a) y = I/py − αI/(py px )

(b) y = αI/p2y

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 (c) y = (1 − α)I/p2y
(d) y = I/py − αI/p2x

13. When Arnold is in the gym, he always spends twice as much time exercising his triceps
(T) as his biceps (B), where T and B are time spent on each activity. What utility
function represents his preferences?

(a) U (T, B) = min{2T, B}

(b) U (T, B) = max{2T, B}
(c) U (T, B) = T + 2B
(d) U (T, B) = min{T, 2B}

14. No matter how many hamburgers (H) Leah consumes, she is always willing to exchange
one hamburger for two tacos (T). What utility function represents her preferences?

(a) U (H, T ) = H + 2T
(b) U (H, T ) = H 1/2 T
(c) U (H, T ) = 2 ln H + ln T
(d) U (H, T ) = ln(2H + T )

15. Liam has utility over cups of coffee (c) and biscuits (b) of U (c, b) = min(2c, b). The
price of coffee is $2 per cup and the price of biscuits is $1 each. With $12, how much
does Liam consume of each?

(a) (c, b) = (6, 0)

(b) (c, b) = (0, 12)
(c) (c, b) = (4, 4)
(d) (c, b) = (3, 6)

16. Naomi has utility over going out for dinner (D) and seeing a movie (M) in the following
form: U (d, m) = min(d, 2m). The price of each is pd and pm , respectively. What is her
indirect utility function?

(a) I/(2pd + pm )
(b) 2I/(2pd + pm )
(c) 2I/(pd + 2pm )
(d) I/(pd + 2pm )

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17. Clive has the following utility function over x and y, U (x, y) = x + 2y. Would he prefer
a decrease in the price of x or y (at an arbitrary pair of current prices, px , py )? In other
words, which price decrease would lead to a higher increase in his indirect utility?

(a) x
(b) y
(c) prefers them equally
(d) not enough information

18. Claude has the following utility function over x and y, U (x, y) = min(3x, y). Would he
prefer a decrease in the price of x or y (at an arbitrary pair of current prices, px , py )? In
other words, which price decrease would lead to a higher increase in his indirect utility?

(a) x
(b) y
(c) prefers them equally
(d) not enough information

19. Ander has utility function U (x, y) = x1/2 y 1/2 , and he faces prices px = 1 and py = 4.
How much income does he need to achieve utility 10?

(a) 32
(b) 35
(c) 36
(d) 40

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 Part II: Multi-Part Questions
Question 1

Suppose Anthony has utility over goods x and y, which are represented by the utility
function U (x, y) = ln x + 3 ln y, and his budget constraint is px x + py y = I.

20. What is the tangency condition for an optimum?

(a) y/3x = px /py

(b) x/3y = px /py
(c) y/3x = py /px
(d) x/3y = py /px

21. How much will Anthony consume of each good x and y?

(a) (x, y) = (I/px , 3I/py )

(b) (x, y) = (I/px , 2I/3py )
(c) (x, y) = (I/3px , I/3py )
(d) (x, y) = (I/4px , 3I/4py )

22. What is the value of λ, the Lagrange Multiplier?

(a) λ = 4/I
(b) λ = (px + 3py )/4I
(c) λ = 4I/(px + 3py )
(d) λ = 4/I(px + 3py )

23. What is the impact of an increase in the price px on indirect utility (i.e. the derivative
of indirect utility with respect to px )?

(a) −4I/px
(b) −I/px
(c) −1/py
(d) −1/px

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 Question 2

Suppose a firm is choosing quantity q of their good to sell to maximize profits:

π(q) = pq − aq 2

where p is price of a unit of the good, and a is a parameter that affects cost aq 2 .

24. What amount q does the firm pick to maximize π?

(a) p/a
(b) p/2a
(c) 2p/a
(d) p/2a2

25. Suppose p = 2. If profit needs to be at least 10, how large can a be?

(a) 1/2
(b) 1/10
(c) 1
(d) 5

26. What is the effect of a change in p on profit (i.e. the derivative of profit wrt price)
when the firm picks quantity optimally? hint: you can use the envelope theorem.

(a) p/2a
(b) 1/a
(c) p/2a2
(d) 2a