Sample examination

questions - Block 4

Integrantes:
0
1
Multiple choice
questions
1. The price of car transport is 30 cents per mile. The price of bus transport is 60 cents per mile.
The marginal utility of Mario’s last mile of car transportation is 80 utils, and the marginal utility of
his last mile of bus transportation is 150 utils. Hence:
a. Mario is currently maximising his utility.
b. Mario could increase his utility by decreasing his consumption of car transportation.
c. Mario could increase his utility by increasing his consumption of car transportation

UMc/Pc = UMb/Pb
80/0.3 = 150/0.6
266.7 > 250

R: c
2. If an agent has a utility function of the form u(x,y)=xy then:

a. They will be indifferent between (6,4) and (3,8).

6 * 4 = 3 * 8 -> 24 = 24

b. They will prefer (6,4) over (5,5).

6*4=5*5 -> 24 < 25

c. They will be indifferent between (6,4) and (5,5).

6 * 4 = 5 * 5 -> 24 < 25

d. None of the above.

3. The slope of the demand for an inferior good is steeper than that of a normal good
because:

a. Income and substitution effects enhance each other.

b. Substitution effect for a normal good is greater than that of an inferior good.
c. Income effect of a normal good is smaller in magnitude (absolute value) than the income
effect of an inferior good.
d. Income and substitution effects offset each other
4. Judith spends all her money buying wine and cheese and wants to maximise her utility from
consuming these two goods. The marginal utility of the last bottle of wine is 60, and the
marginal utility of the last block of cheese is 30. The price of wine is £3, and the price of
cheese is £2. Judith:

a. is buying wine and cheese in the utility-maximising amounts

b. should buy more wine and less cheese
c. should buy more cheese and less wine
d. is spending too much money on wine and cheese.

UMw/Pw = UMc/Pc
60/3 = 30/2
20 > 15
02
Block 4 - Long
response questions
 1. a. Susan buys bread rolls and cheese. One bread roll costs £1 and cheese costs £3 per
500g block. Susan has £12 income to spend on bread and cheese.
i. Draw Susan’s budget constraint and a possible indifference curve. Explain the
assumptions behind the shape of the indifference curve you have drawn.

Queso

Supuestos de la curva de indiferencia:

4- - Cóncava por tasa marginal de sustitución
decreciente
- No saciedad, prefiere más que menos, lo que
C hace que la pendiente sea negativa

12 Pan
 ii. If the price of bread falls to £0.80 per loaf, how will this affect her purchases? Answer in
words and graphically, clearly indicating income and substitution effects of the price change.

Queso

- La línea presupuestaria rota hacia afuera,

4- ahora puede comprar más pan
- ES: Consumo de pan incrementa por ser
relativamente más barato.
A C - EI: Fortalece el efecto total.
B
U1 U2

S I

12 15’ Pan
 iii. If Susan only enjoys bread and cheese when she has 500g of cheese for every bread roll
that she eats, draw her indifference curves. How much bread and cheese should she buy to
maximise her utility? Assume Susan has £12, one bread roll costs £0.80 and cheese costs £3
per 500g block.

Queso
M = x Px + y Py
12 = x * 3 + y * 0.8
Qp = Qq
Qq * 0.8 + Qq * 3 = 12
3.8 * Qq = 12
3.158 y Qq = 3.16 bloques de 500g
U1
Qp = 3.16 rollos de pan
31 U0

3 X1 3.158 Pan
 b) Now let’s assume that Susan grows 100 potatoes each year and all of her income comes from selling
them. She spends all of her income each year consuming potatoes and other goods. For Susan,
potatoes are a Giffen good, in that if her income is fixed in some way (i.e. ignoring the fact that she
sells potatoes and just fixing her income at some value) her consumption of potatoes will rise when
their price rises. The price of potatoes falls and she consumes more potatoes. Taking into account the
fact that her income actually comes from selling potatoes, explain how the last statement can be
consistent with those that precede it.

Otros bienes (y) M = 100 Px

100Px/Py=M/Py
Efecto de sustitución = x1 a x3 (Positivo) ya que
nos anima a consumir más papas.
100Px/Py=M/Py Efecto renta x3 a x2 (Positivo) también nos anima
U1 a consumir más papas

U0

x1 x3 x2 100 = M/Px Papas (x)

b). Now let’s assume that Susan grows 100 potatoes each year and all of her income comes from selling
them. She spends all of her income each year consuming potatoes and other goods. For Susan,
potatoes are a Giffen good, in that if her income is fixed in some way (i.e. ignoring the fact that she
sells potatoes and just fixing her income at some value) her consumption of potatoes will rise when
their price rises. The price of potatoes falls and she consumes more potatoes. Taking into account the
fact that her income actually comes from selling potatoes, explain how the last statement can be
consistent with those that precede it.

El último argumento es consistente con los anteriores ya que ante una caída en el precio de las papas,
Susan tendrá en consecuencia una caída en su ingreso. Como las papas son un bien Giffen, su cantidad
demandada aumentará en una cantidad mayor que el cambio generado por el efecto sustitución.
2. I consume two goods, ice cream and biscuits. I shop once a week, spending £100, at either
Sainsbury or Tesco. Interestingly, I’ve noticed that the bundle I purchase when I visit Tesco
costs more at Sainsbury. Similarly, the bundle I purchase when I visit Sainsbury costs more at
Tesco. And yet, I find that I get the same utility from shopping at either store. Explain how it is
possible for all of these statements to be true.

17 -

Ice Cream
10 - S
T U1

9 20
Biscuits
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