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  • Midterm - Answer Key (Problem Set Part)

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    Konul Ahmadzada-Grichanovskaya
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    This document is an answer key for a microeconomics midterm exam. It includes solutions to budget constraint and utility maximization problems for a consumer with income that can be spent on two goods. The summary is: 1) The consumer faces budgets constraints that are solved for optimal bundles of goods based on prices and income. 2) Changing prices results in different optimal bundles that maximize utility. 3) A reduction in income also results in a new optimal bundle to maximize now lower utility. 4) Parts b-d calculate the optimal bundles, total utility, and effects of changes in prices and income. 5) Part f calculates the substitution and total effects of the changes on consumption

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    This document is an answer key for a microeconomics midterm exam. It includes solutions to budget constraint and utility maximization problems for a consumer with income that can be spent on two goods. The summary is: 1) The consumer faces budgets constraints that are solved for optimal bundles of goods based on prices and income. 2) Changing prices results in different optimal bundles that maximize utility. 3) A reduction in income also results in a new optimal bundle to maximize now lower utility. 4) Parts b-d calculate the optimal bundles, total utility, and effects of changes in prices and income. 5) Part f calculates the substitution and total effects of the changes on consumption

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    3 views2 pages

    Midterm - Answer Key (Problem Set Part)

    Uploaded by

    Konul Ahmadzada-Grichanovskaya
    This document is an answer key for a microeconomics midterm exam. It includes solutions to budget constraint and utility maximization problems for a consumer with income that can be spent on two goods. The summary is: 1) The consumer faces budgets constraints that are solved for optimal bundles of goods based on prices and income. 2) Changing prices results in different optimal bundles that maximize utility. 3) A reduction in income also results in a new optimal bundle to maximize now lower utility. 4) Parts b-d calculate the optimal bundles, total utility, and effects of changes in prices and income. 5) Part f calculates the substitution and total effects of the changes on consumption

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    © All Rights Reserved
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    ECON 502 Midterm

    Dr Fatih Yilmaz

    ANSWER KEY
    U (B, C) = BC

    PB = 6M MUB = C M = 120M

    PC = 2M MUC = B

    (a) Write down Budget Constraint:

    6B + 2C = 120 (3 marks)

    Opportunity cost:

    PB / PC = 6 / 2  3 units of clothes (2 marks)

    (b) Optimal bundle:

    MUB / MUC = PB / PC  C / B  6 / 2  3

    C* = 3B* (5 marks)

    6B + 2(3B) = 120

    B* = 10, C* = 30 (3 marks)

    Total utility:

    U (B,C) = 10.30 = 300 (2 marks)

    (c) New price = 4 M

    MUB / MUC = PB / PC  C / B  4 / 2  2

    C* = 2B* (5 marks)

    4B + 2 (2B*) = 120

    B* = 15, C* = 30 (3 marks)

    Total Utility:

    U’ (B, C) = 15.30  450 (2marks)

    (d) Income decreases = 22M

    PB = 4M

    PC = 2M

    1
    ECON 502 Midterm
    Dr Fatih Yilmaz

    MUB / MUC = PB / PC  C / B  4 / 2  C* = 2B (5 marks)

    4B + 2(2B*) = 120 – 22

    B* = 12.25, C* = 24.50 (3 marks)

    Total Utility:

    U’’ (B, C) = 12.25 * 24.50  300 (2 marks)

    (e) A  Part (b) (3 marks)

    B  Part (c) (3 marks)

    C  Part (d) (4 marks)

    (f)

    A – C : SE  2.25

    + C – B : SE  2.75

    A – B : TE  5 (5marks)

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