Question 1 of 9 5.

0 Points

Let the preferences of a consumer be such that he is willing to give up half a

units of bananas (x2) for a unit of oranges(x1) if the relative
demand/consumption of x2 in terms of x1 is less than 2. If the relative
demand/consumption is greater than 2, then he is willing to give up 2 units of
bananas for one unit of oranges.

(a)Draw the preferences for this consumer, labeling all the points and axes
clearly. Label the bundle that contains 2 oranges and 4 bananas, i.e., (2
oranges,4 bananas).

(b)Given that a unit of oranges is three times as expensive as a unit of bananas,

what is the optimal demand for both the goods?

Question 2 of 9 8.0 Points

Bilal’s utility function is U(x1; x2) = x1x2 (assume x1 and x2 are normal goods).
The price of good 1 is P1, the price of good 2 is
P2, and his income is $m a day. The price of good 1 suddenly falls.
(a)Represent, using a clearly labelled diagram, the hicks substitution effect, the
income effect and the total effect on the
demand of good 1.
(b) On a separate diagram, represent using a clearly labelled diagram,
the slutsky substitution effect on the demand of x1
and explain how is it different from the hicks substitution effect.

Question 3 of 9 7.0 Points

Hira's preferences are represented by U(x;y)= x^2y^3. Her income is $1,000, the
price of x is $5, and the price of y is $20. If
the price of x falls to $4, calculate the (a) slutsky substitution (b) Income and (c)
total effect of the price decrease on the
demand of x. Set up the Lagrange to find all the demands. 
Question 4 of 9 5.0 Points

Represent, on a clearly labelled graph, the point(s) of short-run profit

maximization for a firm with production technology given by y=f(x1,x2) where
x2 is assumed to be fixed. 

Question 5 of 9 5.0 Points

A firm has two variable factors and a production function f(x1; x2) =
x1^1/2x2^1/2. The price of its output is 4, the price of factor 1 is
w1, and the price of factor 2 is w2.

(a) Write down the profit function in terms of both the inputs

(b) What are the long run profit maximization conditions.

(c) If w1 = 2w2, these two equations imply that x1/x2=----------------?

Question 6 of 9 5.0 Points

A firm uses labor and machines to produce output according to the production
function f(L;M) = 4L^1/2M^1/2, where L is the number of units of labor used
and M is the number of machines. The cost of labor is $40 per unit and the cost
of using a machine is $10. On a clearly labelled graph, draw an isocost line for
this firm, showing combinations of machines and labor that cost $400 and
another isocost line showing combinations that cost $200. What is the slope of
these isocost lines?

Question 7 of 9 5.0 Points

A genealogical firm called Roots produces its output using only two inputs Its
production function is f(x1,x2) = x1^1/2x2^1/2

(a) Does the firm have increasing, constant, or decreasing returns to scale?

(b) What is the long run cost minimization condition for this firm?
(c) If input 1 costs w1 and input 2 costs w2, what are the cost minimizing levels
of x1 and x2 to produce 10 units of output?

(Note: both your answers will be in terms of w1 and w2). 

Question 8 of 9 5.0 Points

Draw a diagram to show Total Costs, Average Costs and Marginal Costs in the
case of increasing returns to scale. Explain the shape of each curve.

Question 9 of 9 5.0 Points

Consider the cost function c(y) = 4y^2 + 16.

(a) The average cost function is--------

(b) The marginal cost function is--------

(c) The level of output that yields the minimum average cost of production
is------------

(d) The average variable cost function is------------

(e) At what level of output does average variable cost equal marginal cost?

Show all your working for each part.