QUESTION 31. Utility of a consumer is given by u(2;,22) = min{x,22}. His income is M, and price of good 2 is 1. ‘There are two available price schemes for good 1: (i) per unit price 2 and (éi) a reduced per unit price 2—@ along with a fixed fee T. A consumer would be indifferent between the above schemes if (a) @=2T/M (b) 0=3T/M (c) @=T/M (a) @= (T+1)/M 15. Consider Ms. Bijlee whose utility function is min{2,W'), whore £ is hor eloctricity consumption and W is her consumption of widgets. Suppose Ms. Bijlec’s income is 10 aand the prices of widgets and electricity are 1. In order to curb Ms. Bijlee’s electricity ‘consuinption, the electricity company decides to impose a surcharge of Re. 1 on every unit of electricity consumed in excess of 4 units, What is the resulting reduction in Ms, Bijlee's ‘electricity consumption? @iy Os (1/3 @1/6 11, Consider @ consumer with the utility function u(x,y) = 247+ y. Which one of the following is true? (8) Income elasticity of both goods = and y is 1. (b) Income elasticity of good z is 0. (€) Income elasticity of good y is 0. (2) Income elasticity of good x is 1 and of good y is 0. 42. Suppose Asha’s preferences between two commodities 1 and x2 can be represented by u(z1,22) =min{z, — 5,2 +3). Given an income of Rs. 73, and facing prices of Rs. 3 for x and Rs. 4 for 22, Asha’s optimal consumption bundle of (1,22) will be (0) (125,45) (b) (10.42, 10.42) (© 45,7) (d) (3,16)'s and Brinda’s demand curves for apples are given by p=20—q(Abhik) p=5 - (q/2) (Brinda) Coen ucekteeds eee Re cly evo consumer east and that the mat spol function is given by: p=2+ Q. Then the equilibeium quantity inthe market is: (a) 12 apples. (b) 9 apples (©) 6 apples serps ‘25. Abbik 26. A farmer's demand for wheat is given by the function: = 25 + m/20) whefenis his money income and pi the price of wheat. Let the farmer's money eae te Rs, 1000. Suppose that initially, the farmer purchases wheat inthe market eRe 10 per kg. Now, considera situation where the farmer obsains a BPL card eet allows him to purchase up 1035 kg of wheat for. 5 per kg, What will be the sree inhi demand for wheat atsibutabe to the Slutsky substitution effec? ()3.5ke ()40Kg ©45kg @5.0ks 23, Consider an airport that produces noise (N) that declines as the distance (d) in kilometers, from the airport increases: N(d) = I/d?, Praful works at the airport. Praful’s damage from noise is Rupee | per unit of noise and is associated with where Pruful lives. His costs of commuting are Rupee 1 per kilometer (each way). ‘The closest he can live to the airport isd =0.1 km. {i) What is the distance Praful will live from the airport in the absence of ‘compensation for the noise? i) Suppose Praful is compensated for his damage, wherever he may live. How much will he be compensated? (a) @ Lkm and (ii) Rs. 100 {b) (i) 0.1 km and (ii) Rs. 100 ()@)1km and (ii) Rs. 1 (¢) (i) 0.1 km aad (ii) Rs. 100 6. A consumer has a utility function U(x, y) = 10(x? + 4xy +4y") 1 Cllowing unensus ye eee Y) = 10(x" + 4xy +4y") + 20. Which one of the (a) The goods are imperfect substitutes (b) The goods are perfect substitutes (©) The goods are perfect complements (d) None of the above.7. Suppose « consumer has o utility function U = min. (xty, 2y}. He maximizes his wility : , 2y} iimizes his wilt subjest to hia budget constant and consumes (x*, 9°) =(3,3). Which ore of the following statements must be tr? (3) price of good xis necessarily equal to price of good y (b) price of good x is double the price of good y (6) price of good x is less than or equal to price of good (A) none ofthe above a 10. The elasticity of substitution of the production function flx y)= cx’y* is (a) e/ab (by ate (arb @l 21. A consumer spends an income of Rs. 100 on two goods, dosas and pizzas. Let xdenote the number of dosas and y the number of pizzas consumed (fractions allowed). The consumer's utility function is U=e"*”’ . If the price of a dosa is Rs. 5, and the price of a pizza is Rs. 10, then the number of pizzas this consumer will buy is a) 0 b) 10 o) 5 d) 8 22, Romeo and Juliet have 96 chocolates to divide between them, Romeo has the utility function U= J J" and Juliet has the utility function U = R'_J* where R is Romeo's chocolate consumption and J is Juliet’s chocolate consumption. Which of the following is true a) Romeo would want to give Juliet some chocolates if he had more than 62. b) Juliet would want to give Romeo some chocolates if she had more than 60. ) Romeo and Juliet would never disagree about how to divide the chocolates d) Juliet would want to give Romeo some chocolates if she had more than 64 chocolates.23. A consumer spends an income of Rs. 100 on only two goods, A and B, Assume non satiation, i., more of any good is preferred to less. Suppose the price of B is fixed at Rs. 20. When the price of A is Rs. 10, the consumer buys 3 units of B. When the price of A is Rs. 20, she buys 5 units of A. From this we can conclude I. Aisaninferior good I. Aisa Giffen good Ill. Bis.acomplement of A a) Lonly b) Tand IT ©) Tand Il @) 1, Mand It Questions 26 and 27 Suppose that a typical graduate student at the Delhi School of Economics lives in a two good world, books (x) and movies ( y), with utility function u(x,y) = x'° y°>. Prices of books and movies are 50 and 10 respectively. Suppose the University is considering the following schemes Scheme 1: 750 is paid as fellowship and additional 250 as book grant. Naturally, book grant can only be spent on books. Scheme 2: 1000 as scholarship and gets one movie free on each book they purchase. Believing that books and movies are perfectly divisible, compute the optimal consumption bundle under each scheme, 26, Optimal consumption bundle under scheme 1 is a) (4 books, 80 movies) b) (5 books, 75 movies) ©) (6.5 books, 57.5 movies) ) (10 books, 50 movies) 27. Optimal consumption bundle under scheme 2 is a) (4 books, 80 movies) b) (4 books, 84 movies) ©) (5 books, 75 movies) d) (5 books, 80 movies) QUESTION 7. The utility function u(x,y) = (x+ y)'”?, for (x,y) 2 (0,0), exhibits (a) diminishing marginal rate of substitution and diminishing marginal utilities (b) increasing marginal rate of substitution and diminishing marginal utilities (©) constant marginal rate of substitution and diminishing marginal utilities (d) increasing marginal rato of substitution and constant marginal utilitiesQUESTION 8. Suppose there are just two goods, say 1 and zr. Consider a consumer who chooses 12 = 0 for all income levels w > 0 and all prices p, > 0 and pz > 0. These choices are consistent with the consumer (a) having utility function u(ay, 22) = 21 + 2x2 (b) having utility function u(y, 2) = 201 +22 (6) lexicographically preferring xz to 2 (@) lexicographically preferring 2 to x2 QUESTION 37. A consumer has the utility function u(z,y) = ry. Suppose the consumer demands bundle (2*,y*). Now suppose the seller of good offers a “buy one, get one free” scheme: for each unit of good ¢ purchased, the consumer gets another unit of x for free. Given this scheme, suppose the consumer buys bundle (r4,y4) and gets an additional 24 for free. Which one of the following statements must be true? (0) 2g > 2* and ya >y? (b) zg > 2* and ya = y* (0) a> 2" and ya R. (Draw the budget line of the consumer. (ii) IfR = Oand [= |, find the optimum consumption bundle. (iii) Find the maximum R that the electricity company can extract from the consumer,10. No. 6] A consumer has Rs. 25 to spend on two goods x and y. The price OF good x is Rs, 3 and that of good y is Rs. 4. The continuously differentiable utility function of the consumer is U (x, y) = 12x + 16y 3° —y where x2Qand y2>0. What happens to the optimum commodity bundle if, instead of Rs. 25, the consumer has Rs. 50 or more to spend on. the two goods? 3. Laxmi is a poor agricultural worker. Her consumption basket comprises three commodities: rice and two vegetables - cabbage and potato. But there are occasionally very hard days when her income is so low that she can afford to buy only rice and no vegetables. However, there never arises a situation when she buys only vegetables and no rice. But when she can afford to buy vegetables, she buys only one vegetable, namely the one that, has the lower price per kilogram on that day. Price of each vegetable fluctuates day to day while the price of rice is constant. Write down a suitable utility function that would represent Laxmi’s preference pattern. Explain your answer. 3. Suppose that a price-taking consumer A maximizes the utility function Ule,y) = 2 + y" with a > 0 subject to a budget constraint. Assume prices of both goods, x and y, are equal. Derive the demand funetion for both goods. What would your answer be if the price of 2 is twice that of the price of y? Consider two consumers with identical income M and utility function U = xy where x is the amount of restaurant good consumed and y is the amount of any other good consumed. The unit prices of the goods are given. The consumers have two alternative plans to meet the restaurant bill. Plan A: they eat together at the restaurant. and each pays his own bill. Plan B: they eat together at the restaurant but each pays one-half of the total restaurant bill. Find equilibrium consumption under plan B.8. Consider an economy where the agents live for only two periods and where there is only one good, The life-time utility of an agent is given by U = u(c) + v(d), where u and v are the first and second period utilities, c and d are the first and second period consumptions and 3 is the discount factor. @ lies between 0 and 1. Assume that both w and v are strict ly increasing and concave functions. In the first period. income is w and in the second period, income is zero. The interest rate on savings carried from period 1 to period 2 is r. There is a government, that taxes first period income. A proportion 7 of income is taken away by the government as taxes. This is then returned in the second period to the agent as a lump sum transfer 7. The government's budget is balanced i.c., = tw. Set up the egent’s optimization problem and write the first order condition assuming, an interior solution. For given values of r, 8, w, show that increasing T’ will reduce consumer utility if the interest rate is strictly positive. 9. (a) Consider the utility function U(21,2.2) = (x1 — s1)?8(e2 — #2)", where 81 > Oand s2 > 0 represent subsistence consumption and 21 > si and rp > sz. Using the standard budget constraint, derive the budget share functions and demand functions of the utility maximizing consumer. Are they linear in prices? Justify your answer. (b) Suppose that a consumer maximizes U(xy,.t9) subject to the budget con- straint p(x; +22) 0, x9 > 0, M >and p> 0. More- over, assume that the utility function is symmetric, that is U(x,,22) = U(z2,21) for all 1 > 0 and 2x2 > D. If the solution (2,23) to the con- sumer's constrained optimization problem oxists and is unique, then show that jf = 2}. 1. An agent earns w units of wage while young, and earns nothing while old. The agent lives for two periods and consumes in both the periods. The utility function for the agent is given by u = loge, +loge2, where ¢; is the consumption in period ¢ = 1, 2. The agent faces a constant rate of interest r (net interest rate) at which it can freely lend or borrow (a) Find out the level of saving of the agent while young (b) What would be the consequence of a rise in the interest rate, r on the savings of the agent?‘Question 17: Riya has @ demand function for mango juice given by q= .02m-2p, where mis income and pis price. Riya’s income is 6,000 anc she initially had to pay a price of 30 per bottle of mango juice. The price of mango juice rose to 40. The substitution effect of the price change () Reduced her demand by 20. (b) Increasedher demand by 20 (0) Reduced her demand by 8. (4) Reduced her demand by 32. Question’8: Ankita has a utility function U(c,cz)=c1'/+ 0.83¢2%, where cis her consumption in period 1 end cais her consumption in period 2. Her income in period 1 is2 times as large as her income in period 2. At what interest rate will she choose to consume the same amount in period 1 as. inperiod 2? (@) 040 (@) 0.10 (c) 020 (ao (b) Kamal has been given a free ticket to attend a classical music concert. If Kamal had to pay for the ticket, he would have paid up to Rs. 300/- to attend the concert, On the same evening, Kamal’s alternative entertainment option is a film music and dance event for which tickets are priced at Rs. 200/- each. Suppose also that Kamal is willing to pay up to Rs. X to attend the film music and dance event. What does Kamal do, i.c., does he attend the classical music concert, or does he attend the film music and dance show, or does he do neither? Justify your answer.