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Practice Questions

1. The document contains 7 practice questions related to intermediate microeconomics. The questions cover topics such as utility functions, indifference curves, budget constraints, optimal bundles, and different types of goods. 2. Question 1 asks about the properties of a utility function and whether preferences are convex. Question 2 involves sketching indifference curves and finding marginal utilities and marginal rate of substitution. 3. Subsequent questions explore how changes in income, prices, and endowments affect budget constraints and optimal bundles. The final question differentiates between Giffen, Veblen, and normal goods by discussing income and price offer curves as well as Engel curves.

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729 views2 pages

Practice Questions

1. The document contains 7 practice questions related to intermediate microeconomics. The questions cover topics such as utility functions, indifference curves, budget constraints, optimal bundles, and different types of goods. 2. Question 1 asks about the properties of a utility function and whether preferences are convex. Question 2 involves sketching indifference curves and finding marginal utilities and marginal rate of substitution. 3. Subsequent questions explore how changes in income, prices, and endowments affect budget constraints and optimal bundles. The final question differentiates between Giffen, Veblen, and normal goods by discussing income and price offer curves as well as Engel curves.

Uploaded by

22ech040
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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SGTB Khalsa College

Delhi University

Name of Course: B.A. (Hons.) Economics


Name of Paper: Intermediate Microeconomics I: Behavioural foundations of Market Interac-
tions

Practice Questions

1. Suppose Arnav has the utility function u(x, y) = min{2x, 3y}.


(a) Show that the utility function satisfies completeness, transitivity, and monotonicity. (4)
(b) If the quantity of both the goods increases, does the utility necessarily increase for Arnav? (1)
(c) Are his preferences convex ? Explain your answer. (1)

2. Suppose Dhruv has quasi-linear preferences, that is, linear in one good and non-linear in the other. His
1
utility function is u(x, y) = x 3 + 14 y.

(a) Sketch his ICs for u = 10 and u = 20. [Hint: His ICs will appear like vertically shifted curves.] (2)
(b) Find M Ux and M Uy . Interpret these marginal utilities. (3)
(c) Find M RS. (1)

3. Gagandeep’s utility function is u(x, y) = xy.


(a) Himaanshi mistakenly noted his utility function as v(x, y) = (xy)2 . Do functions u(x, y) and v(x, y)
represent the same preferences? Show with an example. (3)
(b) Jaisleen noted his utility function as v(x, y) = (xy)−1 . Do functions u(x, y) and v(x, y) represent the
same preferences? Show with an example. (3)

4. Kartik has an income of |1,000 which he typically spends on maggi and pizza. His bundle is represented
as (m, p). Pm is |10 per plate and Pp is |20 per slice.
(a) Draw his budget line. (2)
(b) Suppose his income increases to |1,500 and his College subsidizes pizza such that price per slice now
is |10. Draw his new budget line. (2)
(c) Kartik has a kind-hearted teacher who gifts him 25 slices of pizza. What happens to his budget
constraint? (2)

5. Mehak has a utility function u(x, y) = (x + 3)y. Her income is |3,000 and price of good x is |20. Good
y represents money spent on other goods.
(a) Find her optimal bundle. (1)
(b) If her income increases by |1,000, does the optimal bundle change? (1)
(c) What is her optimal bundle if px decreases to |10? (At the old income level.) (1)
(d) Given her original income, what is Mehak’s optimum bundle when her teacher gifts her 4 units of
good x? (1)
(e) Calculate utility in all the above parts and compare. (2)

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6. Praneet’s preferences for consumption this period (c1 ) and consumption next period (c2 ) are given by the
utility function u(c1 , c2 ) = c1 2 c2 . Suppose the price of consumption this period is $1 per unit. Assume
the interest rate i is 10 percent, and the inflation rate π is 5 percent. Praneet has income of $100 this
period and $100 next period.
(a) Graph his budget line clearly mentioning the intercepts. (1)
(b) Find the slope of the budget line and the zero savings point. (1)
(c) Find his optimal bundle. Is he a borrower or a saver? (2)
(d) If the interest rate i falls to 5 percent. Show if he is better off or worse off. (2)
7. Answer the following:
(a) What are price and income offer curves? (2)
(b) Draw the income offer curve and Engel curve for Giffen goods. (2)
(c) Differentiate between Giffen and Veblen goods. (2)

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