ECONOMICS 2150

MIDTERM #1 REVIEW QUESTIONS

To prepare for Midterm #1 study your lecture notes (including the posted lecture notes on
OWL and the additional material covered in the lectures) and work the homework
questions and this review. Beware that the following review questions cover only a fraction
of the material that will be tested on the exam (the questions do not cover the additional
notes covered in the lectures, do not cover the applications taken up in the lectures, and
cover only a select set of questions from the homework), so do not focus your studying by
working only this review (you will not do well on the exam). Answers are provided on the
last page.

Multiple Choice. Choose the best answer.

1. Suppose the market for gasoline is initially in equilibrium. Now suppose that the supply of
gasoline is negatively affected by a shortage of oil from the Middle East, and that the demand
for gasoline is negatively affected by a recession (and therefore lower consumer incomes).
Which of the following accurately describes the new equilibrium?
A. The equilibrium price will rise; the change in the equilibrium quantity is ambiguous.
B. The change in the equilibrium price is ambiguous; the equilibrium quantity will fall.
C. The equilibrium price will fall; the change in the equilibrium quantity is ambiguous.
D. The change in the equilibrium price is ambiguous; the equilibrium quantity will rise.
E. The change in both the equilibrium price and quantity are ambiguous.

2. Which of the following represents a positive question?

A. How will the equilibrium price of corn be affected by a government subsidy?
B. What is the best way to assist low-income families with affordable housing?
C. Would taxes on emissions be the best way to reduce pollution?
D. How can the government best distribute tax cuts?
E. Should the price of housing be lowered?

3. If we were to build a model measuring the supply of corn, which of the following would be
an example of an exogenous variable in the model?
A. The price of corn.
B. The quantity supplied of corn.
C. The quantity of rain.
D. The price of BMW automobiles.
E. Both C and D.

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4. Which of the following statements are TRUE?
A. If a consumer’s marginal utility for x is MUx=1/x, then the consumer’s total level of
utility is decreasing as his consumption of x is increasing.
B. It is possible for the indifference curves of one individual to cross the indifference curves
of another individual.
C. If a consumer’s marginal utility for x is positive but diminishing, then it must be the case
that the consumer’s dislikes x.
D. All of the above are true.
E. None of the above are true.

5. Indifference curves have a negative slope when

A. the consumer likes both X and Y.
B. the consumer dislikes both X and Y.
C. the consumer likes X but dislikes Y.
D. the consumer likes Y but dislikes X.
E. Both A and B are true.

6. Suppose a consumer considers two goods, x and y, to be perfect complements and likes to
have exactly 2 units of y with every 1 unit of x. Which of the following utility functions
might represent these preferences?
A. U = 2min(0.5x,y)
B. U = 2min(x,0.5y)
C. U= 2x + y
D. U = x + 2y
E. U = xy2

7. Peter likes x and y and is always willing to trade 2 units of good y for 1 unit of
good x. Which one of the following utility functions would represent Peter’s preferences?
A. U=xy2
B. U=4x+2y
C. U= 2x+4y
D. U=min(x,2y)
E. U=x+2y

8. Suppose that a consumer has a utility function with MUx=8x3y and MUy=2x4. What is the
marginal rate of substitution?
A. x/4y
B. 10x7y
C. 2x2-8x3y
D. 2x4-8x3y
E. 4y/x

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9. Joe’s utility function is U=x+2y and Adam’s utility function is U=4x+8y. Which of the
following statements about these individuals are TRUE?
A. Joe and Adam have the same preferences.
B. Joe’s ranking of any pair of bundles is different than Adam’s.
C. Adam’s indifference curves are twice as far out from the origin as Joe’s.
D. All of the above are true.
E. None of the above are true.

10. Suppose the price of X is $3, the price of Y is $15, and the consumer’s income is $96.
Which of the following baskets is on the consumer’s budget line?
A. X=32, Y=6.4
B. X=22, Y=2
C. X=4, Y=14
D. X=0, Y=32
E. X=6.4, Y=0

11. Sarah is a low-income consumer who consumes only two goods, X and Y. When the price of
X was $2 per unit and the price of Y was $4 per unit, she spent her entire income to buy 50
units of X and 25 units of Y. Now the government levies a tax on Y. Market prices haven’t
changed, but consumers must now pay a tax of $4 for unit of Y purchased. To lessen the
burden of the tax on low-income consumers, the government pays the low-income consumers
a lump sum subsidy of $40. What is the equation of Sarah’s new budget line?
A. Y=50-0.5X
B. Y=50-1.5X
C. Y=60-1.5X
D. Y=30-0.25X
E. Y=20-0.25X

12. Thomas consumes two goods, X and Y. Initially, his budget line was described by the
equation Y=20-2X. At a later time, his budget line was described by the equation Y=10-X.
If the price of Y did not change between the two time periods, then the change in his budget
line can be described by the fact that
A. the price of X and Thomas’s income both increased.
B. the price of X increased and Thomas’s income decreased.
C. the price of X decreased and Thomas’s income increased.
D. the price of X and Thomas’s income both decreased.
E. Thomas’s utility function changed.

13. If Meghan spends all her income, she can afford to buy 4 units of X and 6 units of Y. She
can also afford to buy 2 units of X and 9 units of Y. If she spends all of her income on X,
how many units of X can she afford to buy?
A. 9
B. 2
C. 8
D. 24
E. 6
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14. At current consumption levels, Jane’s marginal utility from X is 2 and her marginal utility
from Y is 5. The price of X is $1 per unit and the price of Y is $2 per unit.
A. Jane’s consumption choice is at an interior optimum.
B. Jane would want to trade X for more Y.
C. Jane would want to trade Y for more X.
D. If X and Y are perfect substitutes for Jane, her best consumption choice is to consume all
X and no Y.
E. Both C and D are true.

15. A consumer has a utility function U=20x3y2. The consumer’s income is $20, and prices are
Px=4 and Py=2. What is the consumer’s optimal consumption basket?
A. (x,y)=(3,0)
B. (x,y)=(0,6)
C. (x,y)=(3,4)
D. (x,y)=(4,2)
E. (x,y)=(5,10)

16. A consumer has a utility function U=min(4x,2y). The consumer’s budget constraint can be
expressed as 6x+3y=132. What is the consumer’s optimal consumption basket?
A. (x,y)=(17.6,8.8)
B. (x,y)=(11,22)
C. (x,y)=(4,36)
D. (x,y)=(31.5,2)
E. (x,y)=(0,44)

17. A consumer has a utility function U=3x+y. The consumer’s income is $200, and prices are
Px=2 and Py=6. What is the consumer’s optimal consumption basket?
A. (x,y)=(16.67,50)
B. (x,y)=(10,30)
C. (x,y)=(100,0)
D. (x,y)=(0,33.33)
E. (x,y)=(100,33.33)

Use the following to answer the next TWO questions:

Nathan has an income of $215 and consumes only two goods, x and y. The price of good y is
$10 per unit. The price of good x is $10 per unit for the first 20 units and $15 per unit for each
additional unit.

18. What is the maximum number of units of good x that Nathan can buy with his income?
A. 1
B. 22
C. 14.33
D. 21
E. 20

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19. If Nathan buys 20 units of x, how many units of y can he afford to buy?
A. 21.5
B. 0
C. 1
D. 21
E. 1.5

Graphing. Sketch a series of indifference curves in the graphs provided for individuals
with the following preferences:

1. An individual who dislikes both X and Y, yet is willing to eat additional units of X as long as
he is compensated by being allowed to eat 2 fewer units of Y.

Good Y

Good X

Be sure that in the diagram above, you have placed the goods on the correct axes,
remembered to draw the arrow of increasing preference, and clearly labelled any
additional information that is needed (like equations of rays or slopes of straight lines).

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2. An individual who likes X and Y, but only eats 1 unit of X with every 2 units of Y.

Good Y

Good X

Be sure that in the diagram above, you have placed the goods on the correct axes,
remembered to draw the arrow of increasing preference, and clearly labelled any
additional information that is needed (like equations of rays or slopes of straight lines).

3. An individual who likes X and Y and is always willing to trade 1 unit of Y for 3 unites of X.

Good Y

Good X

Be sure that in the diagram above, you have placed the goods on the correct axes,
remembered to draw the arrow of increasing preference, and clearly labelled any
additional information that is needed (like equations of rays or slopes of straight lines).

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Answers:
Multiple Choice
1. B
2. A
3. C
4. B
5. E
6. B
7. B
8. E
9. A
10. B
11. D
12. D
13. C
14. B
15. C
16. B
17. C
18. D
19. E

Graphing
1. Downward sloping with a constant slope of -2, arrow pointing towards the origin.
2. L-shaped, ray is Y=2X, arrow pointing away from the origin.
3. Downward sloping with a constant slope of -1/3, arrow pointing away from the
origin.