1. Suppose that, holding prices constant, Alice has preferences ove...

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1. Suppose that, holding prices constant, Alice has preferences over the number of books she purchases that look like the table shown. Draw Alice's Engel curve and then determine which of the following statements is true. a. Books are a normal good to Alice over all income ranges. b. Books are an inferior good to Alice when income increases beyond $25,000. c. Books are a normal good to Alice when income increases beyond $25,000. d. We cannot determine whether books are normal or inferior without more information. 2. Suppose that Sonya faces an increase in the price of pasta, as depicted here, moving her from an optimum bundle of rice and pasta at A to an optimal bundle at B. Based on the graph, which of the following statements is true? a. For pasta, the substitution effect and income effect work in opposite directions, but the substitution effect is dominant. b. For pasta, the substitution effect and income effect work in the same directions, but the substitution effect is much stronger. c. For pasta, the substitution effect and income effect work in the same directions but the income effect is much stronger. d. For pasta, the substitution effect and income effect work in the same direction, and are of the same approximate size. 3. Suppose that Grover consumes two goods, cookies and milk. Grover's income expansion path is shown in the diagram below. Use the information in the diagram to determine which of the following statements is false. a. At low levels of income, milk is a normal good for Grover. b. At high levels of income, cookies become an inferior good for Grover. c. At low levels of income, cookies are a normal good for Grover. d. At high levels of income, milk becomes an inferior good for Grover. 4. Josie gets great pleasure from eating flan. Her preferences for flan and tofu are given in the graph below: Suppose that Josie's income is $40, and that tofu costs $1. Draw budget constraints for Josie given three different prices for flan: $5, $8, and $10. Find the optimal consumption of flan at each of those prices. What shape does Josie's demand curve for flan look like, and what is its demand elasticity? a. Josie's demand curve is downward sloping and relatively flat, indicating elastic demand. b. Josie's demand curve is downward sloping and steep, indicating inelastic demand. c. Josie's demand curve is a horizontal line, indicating perfectly elastic demand. d. Josie's demand curve is a vertical line, indicating perfectly inelastic demand. 5. Consider the following statement: “If pizza and calzones are substitutes, then the substitution effect of a price change will be in a different direction than if pizza and calzones are complements.” Which of the following is most accurate regarding the previous statement? a. The statement is false: the substitution effect will be in the same direction whether the two goods are substitutes or complements. b. The statement is true and based on the fact that there is no substitution effect with perfect complements. c. The statement is true and based on the fact that there is no substitution effect with perfect substitutes. d. The statement is false and based on the fact that there is no income effect with perfect complements. 6. At a price of $3 each, Yoshi (an average New Yorker) drinks 200 44oz. sodas each year. Concerned about burgeoning obesity, the Mayor of New York proposes a $0.50 tax on such drinks. He then proposes compensating consumers for the price increase by mailing each resident a check for $100. What will happen to Yoshi's consumption of soda under the new plan? a. His consumption of soda will increase. b. His consumption of soda will decrease. c. His consumption of soda may increase or decrease. d. His consumption of soda will be unaffected. 7. A principles of microeconomics instructor regularly asks her class to give an example of an inferior good. “No matter how poor we might be,” the students tell her, “ramen noodles are an inferior good.” Which of the following statements is true? a. Ramen noodles are inferior goods at all levels of income. b. Ramen noodles are normal goods at all levels of income. c. Ramen noodles may be inferior goods at low levels of income, but they will be normal goods at higher levels of income. d. Ramen noodles may be inferior at high levels of income, but they will be normal goods at very low levels of income. 8. Can you determine whether a good is normal or inferior by looking at the shape of a single indifference curve? a. No, you need more than one indifference curve to determine whether a good is normal or inferior. b. Yes, if the indifference curve is flat enough, one of the goods is inferior. c. Yes, if the slope of the indifference curve changes enough. d. Yes, if the indifference curve is steep enough, one of the goods is inferior. 9. Kim's utility function is given by U = 5X +2Y, where MUX = 5 and MUY = 2. Suppose that at the prices PX and PY of good X and good Y, respectively, Kim is consuming (optimally) some positive amount of good X and some positive amount of good Y. What is the price of good X in terms of the price of good Y? a. PX = 2.5PY b. PX = 5PY c. PX = 2PY d. PX = 0.4PY 10. Kim's utility function is given by U = 5X +2Y, where MUX = 5 and MUY = 2. Suppose that at the prices PX and PY of good X and good Y, respectively, Kim is consuming (optimally) some positive amount of good X and some positive amount of good Y. How will her consumption change if PX doubles, while PY does not change? a. Kim will consume half as much of good X, and consume more of good Y. b. Kim will consume less of both goods. c. Kim will consume the same amount of good X, and consume less of good Y. d. Kim will consume only good Y and none of good X. 11. Consider the production function presented below. If the firm decides to employ 6 units of capital and 1 worker, what is the firm's output? a. 3600 b. 1200 c. 500 d. 600 12. Consider the production function presented below. Plot the combinations of labor and capital that can be used to produce 600 units of output on a graph, with labor on the horizontal axis and capital on the vertical axis, and connect the dots to form the production isoquant corresponding to 600 units of output. Which of the following best describes the isoquant you have graphed? a. The production isoquant is upward sloping and curved. b. The production isoquant is downward sloping and curved. c. The production isoquant is a horizontal line. d. The production isoquant is downward sloping and straight. 13. The table below represents the production function for Hawg Wild, a small catering company specializing in barbequed pork. The numbers in the cells represent the number of customers that can be served using various combinations of labor and capital. Suppose that Hawg Wild employs 5 units of capital and 2 workers, but that the owner, Billy Porcine, is considering adding his nephew to the payroll. What will the marginal product of Billy's nephew be? a. 21 b. 79 c. 84 d. 61 14. The table below represents the production function for Hawg Wild, a small catering company specializing in barbequed pork. The numbers in the cells represent the number of customers that can be served usingvarious combinations of labor and capital. Suppose that Hawg Wild employs 5 units of capital and 2 workers, but that the owner, Billy Porcine, is considering adding another meat smoker to the kitchen (which will raise the amount of capital input to 6 units). What will the marginal product of the smoker be? a. 40 b. 61 c. 44 d. 30 15. Suppose that a firm's production function is given by Q = K0.33L0.67, where MPK = 0.33K−0.67L0.67 and MPL = 0.67K0.33L−0.33. As L increases, what happens to the marginal product of labor? What happens to the marginal product of capital? a. MPL increases; MPK increases b. MPL increases; MPK decreases c. MPL decreases; MPK increases d. MPL decreases; MPK decreases 16. The table below represents the production function for Hawg Wild, a small catering company specializing in barbequed pork. The numbers in the cells represent the number of customers that can be served using various combinations of labor and capital. Hawg Wild employs 5 units of capital and 2 workers. Billy is considering the choice between hiring another worker or buying another smoker. If smokers cost $8 and workers cost $12, then at the margin, what is the most costeffective choice for Billy to make? a. Hire another worker. b. Buy another smoker. c. Since either one will increase output, it doesn't matter which one Billy chooses. d. There is not enough information here to answer this question. 17. Heather enjoys knitting scarves with tassels. To do so she requires skeins of yarn and the tassels. Her preference over yarn and tassels is given by the indifference curve U. An initial budget constraint, BC1, representing her budget of $100 and the price of yarn being $2 per skein and $1 per tassel, and her optimal consumption point, A, are also given. Now presume her local yarn store, KnitWits, has a sale where yarn is now $1. Heather is willing to adjust her budget as to keep her on indifference curve U, using the savings to fund other hobbies. Use the infinite line drawing tool to draw the new budget constraint with the new price of yarn such that Heather will consume on indifference curve U. Label this BC2. Next, use the double drop line to identify her new optimal consumption bundle, A'. Finally, using the highlighter tool, on the tassel axis, highlight the size of the substitution effect as she substitutes away from using 50 tassels. Label this SubEffect. 18. Here you are given Adam's and Betty's demand for gasoline in gallons per month. Presuming they are the only two consumers in the market, use the line drawing tool to draw the demand curve for the market. Label it D_Total. 19. Here you are given Adam's and Betty's demand for gasoline in gallons per month. Presuming they are the only two consumers in the market, use the multipoint line drawing tool to draw the demand curve for the market. Label it D_Total. 20. Below is the shortrun production function for a given firm with five units of capital. Use the multipoint line drawing tool to plot the firm's shortrun production function as a function of labor from L=0 to L=5. Label the curve SR_Production. Capital, K Labor, L Output, Q 5 0 0 5 1 8 5 2 14 5 3 17 5 4 19 5 5 20 21. Below is the shortrun production function for a given firm with five units of capital. Use the multipoint line drawing tool to plot the firm's shortrun marginal productivity of labor function as a function of labor from L=1 to L=5. Label the curve MPL. Capital, K Labor, L Output, Q 5 0 0 5 1 22 5 2 32 5 3 39 5 4 45 5 5 50

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