Test Bank for Microeconomics An Intuitive Approach

with Calculus 2nd Edition Thomas Nechyba

1305650468 9781305650466
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Chapter 05 Different Types of Tastes

TRUEFALSE

1. Homothetic tastes are always tastes over essential goods.

(A) True

(B) False

Answer : (B)

2. Tastes for perfect substitutes are both homothetic and quasilinear.

(A) True

(B) False

Answer : (A)

3. Tastes for perfect complements are both homothetic and quasilinear.

(A) True

(B) False

Answer : (B)

4. There are no quasilinear tastes that have elasticity of substitution equal to 1 everywhere.

(A) True

(B) False

Answer : (A)
5. There are no quasilinear tastes that have constant elasticity of substitution.

(A) True

(B) False

Answer : (B)

6. There is no elasticity of substitution that is inconsistent with tastes being homothetic.

(A) True
(B) False

Answer : (A)

7. Consider the utility function . If , the elasticity of

substitution is equal to 1.

The elasticity of substitution for CES utility functions is .

(A) True

(B) False

Answer : (A)

8. Consider the utility function . If , the elasticity of

substitution is equal to .

(A) True (B)

False

Answer : (B)

9. All homogeneous functions (of any degree) are homothetic but not all homothetic functions are
homogeneous (of some degree).

(A) True (B)

False

Answer : (B)

10. If tastes are Cobb-Douglas, they can be represented by a utility function that is homogeneous of
degree k where k can take on any positive value.

(A) True (B)

False

Answer : (A)

11. When two goods are perfect substitutes, averages are better than extremes, resulting a
diminishing marginal rate of substitution.

(A) True
(B) False

Answer : (B)

12. In the case of perfect complements, more is not necessarily better.

(A) True

(B) False

Answer : (A)

MULTICHOICE

13. Suppose consumer cannot taste the difference between Miller Lite and Bud Light, but Miller Lite
is sold in 12 ounce cans while Bud Light is sold in 8 ounce cans. In a graph with cans of Miller Lite
on the horizontal and cans of Bud Light on the vertical axis, which of the following is the correct
slope for this consumer's indifference curves:

(A)

(B) -1

(C)

(D) There is not enough information to tell.

Answer : (C)

14. Consider the utility function . Which of the following are true statements about
the indifference maps represented by this function.

(A) MRS=-1 along the 45 degree line if and only if .

(B) MRS=-1 along a ray steeper than the 45 degree line if and only if .

(C) MRS=-1 along a ray shallower than the 45 degree line if and only if .

(D) All of the above.

(E) None of the above.

Answer : (A)

ESSAY
15. Suppose our tastes are homothetic. It is often observed that people become more rigid --- more
set in their ways --- as they get older. Can you translate this observation into "economics-speak" by
discussing which feature of our tastes is likely the be changing as we get older?

Graders Info :

The feature of our tastes that is indicative of "flexibility" is the degree of substitutability in our
indifference map. The more substitutable we think of goods, the more flexible we are in terms,
whereas we become more inflexible as our tastes treat goods as relatively more complementary.

16. Suppose our tastes can be represented by the function . It is

often observed that people become more rigid --- more set in their ways --- as they get older. What
parameter is changing as we get older --- and how is it changing? (Explain.)

Graders Info :

The parameter is increasing from a value as low as -1 to a value as high as --- causing our
elasticity of substitution to fall from a value as high as to one as low as 0 as we grow older.

17. Suppose the only characteristic of beer that a consumer cares about is alcohol content.
Currently, Bud Light and Miller Lite both have the same alcohol content.

a. Illustrate the consumer's indifference curves in a graph with ounces of Miller Lite on the
horizontal and ounces of Bud Light on the vertical axis.

b. Suppose that the producers of Bud Light lower the price of Bud Light. How will your answer to (a)
change?

c. Suppose that the producers of Bud Light lower the alcohol content of their beer by 50%. How will
your answer to (a) change?

d. Since we identify tastes with indifference maps, would you say that the consumer's tastes have
changed in (b) or (c)?

e. How could we change the units we use to measure Miller Lite in order to get the indifference map
in (c) to again look like the one in (a)?

Graders Info :

a. The indifference curves are straight lines with slope of -1.

b. The answer will not change --- prices affect budgets, not tastes.

c. The indifference curves will again be straight lines, but this time with slope of -2.
d. While the indifference map has changed in (c), the consumer's tastes have not. Rather, the nature
of the underlying product has changed --- and the same tastes that care only about alcohol content
therefore give rise to an indifference map that looks different.

e. If we changed the units of Miller Lite to "half-ounces", we would again have indifference curves
that are straight lines with slope of -1.

18. Suppose the only characteristic of beer that a consumer cares about is alcohol content.
Currently, Bud Light and Miller Lite have the same alcohol content.

a. Using to denote ounces of Miller Lite and to denote ounces of Bud Light, what's the simplest
possible utility function that can describe this consumer's tastes over the two products.

b. Suppose Bud Light lowers its alcohol content by 50%. How would you change the utility function
to account for this?

c. Derive the MRS for the functions in (a) and (b) --- and interpret your answer.

Graders Info :

a.

b. or
c. In (a), MRS = -1 --- i.e. no matter what bundle the consumer consumers, she is always willing to
trade one Bud Light for one more Miller Lite.

In (b), MRS = -2 --- i.e. no matter what bundle the consumer consumes, she is always willing to trade
2 Bud Lights (that now have half the alcohol content) for 1 more Miller Lite.

19. Suppose you are very picky about your outdoor BBQ experiences --- and you need exactly 1 cup
of lighter fluid for each bag of charcoal you use. If you have either leftover charcoal or leftover
lighter fluid, you simply discard it.

a. With cups of lighter fluid on the horizontal and bags of charcoal on the vertical axis, illustrate
some of your indifference curves.

b. Suppose that your favorite charcoal has just gotten better because the producer has infused the
charcoal with half a cup of lighter fluid per bag. How does your answer to (a) change?

c. How could you change the units in which lighter fluid is measured on the horizontal axis to get
your graph from (b) to look the same as you original graph in (a)?

Graders Info :

a. The indifference curves would have an L-shape, with the corner of each indifference curve lying
on the 45 degree line.

b. The indifference curves would still be L-shaped, but the corners of the curves would now lie on
the 60-degree line; i.e. 1 charcoal bag is paired with half a cup of lighter fluid, 2 bags with 1 cup,
etc.

c. If we measure lighter fluid in half cups, we get back the original graph.

20. Suppose you are very picky about your outdoor BBQ experiences --- and you need exactly 1 cup
of lighter fluid for each bag of charcoal you use. If you have either leftover charcoal or leftover
lighter fluid, you simply discard it.

a. Letting cups of lighter fluid be denoted as and bags of charcoal as , give the simplest possible
utility function that captures your tastes.

b. Suppose that your favorite charcoal has just gotten better because the producer has infused the
charcoal with half a cup of lighter fluid per bag. How does your answer to (a) change?

Graders Info :

a.

b. or