Intermediate Microeconomics 111-1, Final Exam, December 2022

Intermediate Microeconomics 111-1

Final Exam

Part I. (60 points) Select the best answer for each of the following questions.
1. A curve that represents the consumer’s “willingness to pay” is the consumer’s
A. Exchange curve
B. Demand curve
C. Supply curve
D. None of the above
2. Which of the following utility functions is an example of preferences for perfect
complements?
A. U ( x, y ) = y x
B. U ( x, y) = min {2 x, y}
C. U ( x, y) = 3x + 5 y
D. U ( x, y) = 2 x 2 + 4 y
3. Which of the following is held constant along an income-consumption curve?
A. Income.
B. Consumption of all goods.
C. The price of all goods other than the good of interest.
D. The prices of all goods.
4. The concept of equivalent variation means:
A. the change in income necessary to hold the consumer at the final level of
utility as price changes.
B. the change in income necessary to restore the consumer to the initial level of
utility as price changes.
C. the income effect.
D. the substitution effect.
5. Identify the truthfulness of the following statements.
I. It is possible for an Engel curve to be positively sloped for a certain region of
income and negatively sloped for another region.
II. The income elasticity of demand for a normal good is negative.
A. Both I and II are true.
B. Both I and II are false.
C. I is true; II is false.
D. I is false; II is true.
6. Identify the truthfulness of the following statements.
I. For normal goods, the income and substitution effects work in the same direction.
II. Some normal goods are Giffen goods.
A. Both I and II are true.
B. Both I and II are false.
C. I is true; II is false.
D. I is false; II is true.
7. Which of the following statements is FALSE?
A. If the price of a good falls, the substitution effect will always induce the
consumer to consume at least as much of the good as before the price
change.
B. All Giffen goods are inferior goods.
C. As the price of an inferior good increases, the income effect will induce the
consumer to consume less of the good.
D. As the price of a normal good falls, the income effect will result in an
increase in consumption of the good.
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 Intermediate Microeconomics 111-1, Final Exam, December 2022

8. When comparing a cash subsidy and a voucher worth the same dollar amount,
but only good for the purchase of a single good:
A. a consumer can never be better off with a cash subsidy than with a voucher.
B. a consumer can never be better off with a voucher than with a cash subsidy.
C. a cash subsidy will always make the consumer better off than the consumer
would be with a voucher.
D. a voucher will always make the consumer better off than the consumer would
be with a cash subsidy.
9. Indifference curves have a negative slope when
A. the consumer likes good X but dislikes good Y.
B. the consumer likes good Y but dislikes good X.
C. the consumer likes both good X and good Y.
D. the consumer dislikes both goods.
10. Identify the truthfulness of the following statements.
I. The substitution effect is unambiguous in its direction.
II. Direction of the income effect depends on whether the good is a normal or
an inferior good.
A. Both I and II are true.
B. Both I and II are false.
C. I is true; II is false.
D. I is false; II is true.
11. At a consumer’s interior optimum solution, which of the following will not
necessarily hold true?
A. 𝑀𝑈# = 𝑀𝑈%
&'( *
B. &')
= *(
)
&'
C. 𝑀𝑅𝑆#,% = &'(
)
*(
D. 𝑀𝑅𝑆#,% =
*)
12. Suppose that 𝑀𝑈# = 20 and 𝑀𝑈% = 10. Further suppose that the consumer’s
budget constraint can be expressed as 10𝑥 + 20𝑦 = 400. For this consumer, the
optimal amount of good 𝑥 to buy would be
A. 5
B. 0
C. 20
D. 40
13. If a consumer’s preferences for two goods, say food and clothing, are such that
as income increases, consumption of food and clothing both increase, we can say
that
A. food and clothing are inferior goods.
B. food is a normal good and clothing is an inferior good.
C. food is an inferior good and clothing is a normal good.
D. food and clothing are both normal goods.
14. On a typical optimal choice diagram, with budget lines and indifference curves,
the line that connects the consumer’s optimal baskets as the price of one good
changes holding income and the price of the other good constant is called the
consumer’s:
A. income-consumption curve.
B. price-consumption curve.
C. demand curve.

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 Intermediate Microeconomics 111-1, Final Exam, December 2022

D. Engel curve.
15. Suppose the price of A is $20, the price of B is $10, and that the consumer is
currently spending all available income. At the consumer’s current consumption
basket the marginal utility of A is 6 and the marginal utility of B is 4.
A. The consumer is currently maximizing utility.
B. The consumer could increase utility by consuming more of good A and
less of good B.
C. The consumer could increase utility by consuming more of good B and less
of good A.
D. Nothing can be said about the consumer’s utility because we do not know
the consumer’s income or utility function.
16. Which of the following statements is true about the consumer’s expenditure
minimization problem?
A. The consumer’s expenditure minimization problem results in the same
optimal basket as the consumer’s utility maximization problem if the
required level of utility for the expenditure minimizer is the same as the
maximized utility for the utility maximizer.
B. The consumer’s expenditure minimization problem has an optimum at an
expenditure of zero.
C. The consumer’s utility maximization problem results in a tangency between
the budget constraint and an indifference curve, whereas the expenditure
minimization problem results in a solution where the indifference curve
crosses the budget line.
D. The consumer always prefers to maximize utility rather than to minimize
expenditure.
17. Consider a market with 𝑄6 = 240 − 6𝑃 and Qs = 2P. What is the consumer
surplus in this market?
A. 1,000
B. 300
C. 750
D. 500
18. Which of the following statements is FALSE?
A. If the price of a good falls, the substitution effect will always induce the
consumer to consume at least as much of the good as before the price change.
B. All Giffen goods are inferior goods.
C. As the price of an inferior good increases, the income effect will induce the
consumer to consume less of the good.
D. As the price of a normal good falls, the income effect will result in an
increase in consumption of the good.
19. Under what circumstances is the demand curve upward-sloping?
A. When the good is a normal good.
B. When the good is an inferior good and the substitution effect outweighs the income
effect.
C. When the good is an inferior good and the income effect outweighs the substitution
effect.
D. The demand curve can never be upward-sloping.
20. Suppose the price of good 𝑥 is $5 and the price of good 𝑦 is $7. Also, suppose
𝑀𝑈# = 𝑦 and 𝑀𝑈% = 𝑥. Which of the following baskets could be an interior
optimum?
A. x = 7, y = 5
B. x = 6, y = 4

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 Intermediate Microeconomics 111-1, Final Exam, December 2022

C. x = 5, y = 7
D. x = 4, y = 6

Part II. Answer the following questions.

1. (10 points) Consider a consumer who chooses how much of a good to consume in
each of two time periods. Denote the amount of consumption in each period by
(𝐶< , 𝐶= ), and the amount of income the consumer earns in each period by (𝐼< , 𝐼= ). The
consumer can borrow or lend money at a fixed interest rate 𝑟.
a. What is the consumer's maximum amount of current consumption? What is the
consumer's maximum amount of future consumption?
b. Write down the consumer's budget constraint in terms of present value and
future value respectively.
c. Illustrate the intertemporal budget line using a diagram. Clearly label the
horizontal and the vertical intercepts. What is the slope of the budget line?
d. Assuming the consumer has strictly convex preferences, use a diagram to
illustrate an optimal consumption bundle when the consumer is a borrower.
Does the consumer’s utility become higher or lower when he is allowed to
borrow?

2. (10 points) Suppose that a consumer considers coffee and tea to be perfect
substitutes, but he requires two cups of tea to give up one cup of coffee. The
consumer’s budget can be written as 3𝐶 + 𝑇 = 10.
a. What is the slope of the budget line?
b. What is the slope of the indifference curve?
c. Find the optimal consumption bundle for the consumer. Use a diagram to
illustrate your answers.

3. (10 points) Carina buys two goods, food F and clothing C, with the utility function
U = FC + F. She has an income of 20. The price of clothing is 4.
a) Derive the equation representing Carina’s demand for food, and draw this
demand curve for prices of food ranging between 1 and 6.
b) Calculate the income and substitution effects on Carina’s consumption of food
when the price of food rises from 1 to 4, and draw a graph illustrating these
effects. Your graph need not be exactly to scale, but it should be consistent
with the data.

4. (10 points) There are two types of customers in a market for sheet metal. Let P
represent the market price.
The total quantity demanded by Type I consumers is Q1 = 100 - 2P, for 0< P < 50.
The total quantity demanded by Type II consumers is Q2 = 30 - P, for 0< P < 30.
a. Draw the total market demand on a clearly labeled graph.
b. Write down the market demand function.