Section I: True or False

This section is worth a total of 20 marks. There are 10 questions worth 2 marks each; answer all
of them. Simply indicate if you think the statement is true or false.

1. Sarah and Jill always always buy positive quantities of oranges and bananas at Safeway. If
Sarah likes bananas more than Jill but they have the same incomes, they will have different
marginal rate of substitutions between oranges and bananas. (FALSE)
True False
2. If there are two goods with positive prices and the price of one good is reduced, while income
and other prices remain constant, then the size of the budget set is reduced. (FALSE)
True False
3. A consumer prefers more to less of every good. Her income rises, and the price of one of the
goods falls while other prices stay constant. These changes must have made her better off.
(TRUE)
True False
4. If Jim’s utility function is U (x1 , x2 ) = (x1 + 3)2 + 5x2 , the slope of his indifference curves is
constant along the line x1 = 3x2 . (FALSE)
True False
5. Jenna’s utility function is U (x1 , x2 ) = (x1 + x2 )0.5 . Her indifference curves are downward-
sloping, parallel straight lines. (TRUE)
True False

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6. Pete’s utility function is U (x, y) = x0.2 y 0.3 . His marginal rate of substitution between x
and y does not change if the amount of both goods he consumes falls by 20%. (TRUE)
True False
7. Penny is a utility maximizer. Prices change and she is better off. So the new bundle costs
more at the old prices than the old bundle did. (TRUE)
True False
8. Sam’s utility function is U (x1 , x2 ) = x1 x2 . She has diminishing marginal rate of substitution
between goods 1 and 2. (TRUE)
True False
9. If preferences are homothetic, then the slope of the Engel curve for any good will decrease as
income increases. (FALSE)
True False
10. If there is a price increase for a good that Harper consumes, his equivalent variation is the
change in his income that allows him to purchase his new optimal bundle at the original prices.
(FALSE)
True False

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Section II: Multiple Choice
This section is worth a total of 36 marks. There are 12 questions worth 3 marks each; answer all
of them. Select the best answer from those available.
1. Preferences are said to be monotonic if
(a) all goods must be consumed in fixed proportions
(b) all goods are perfect substitutes
(c) more is always preferred to less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C
(d) there is a diminishing marginal rate of substitution
(e) none of the above

2. Yoram’s utility function is U (x, y) = 2x + 5y. The price of x is $4 and the price of y is $15.
Yoram has $150 a week to spend on x and y. Yoram is offered a chance to join a club of y
consumers. If he joins, he can get y at a price of $10. What is the most that Yoram would be
willing to pay to join the club?

(a) Nothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A
(b) $30 a week
(c) $50 a week
(d) $75 a week
(e) None of the above

3. Colette consumes goods x and y. Her indifference curves are described by the formula y =
k/(x + 7). Higher values of k correspond to higher untility levels.
(a) Colette likes good y and hates good x.
(b) Colette prefers bundle (12, 16) to bundle (16, 12). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B
(c) Colette prefers bundle (8, 5) to bundle (5, 8).
(d) Colette likes good x and hates good y.
(e) More than one of the above statements are true.

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4. If there are only two goods, if more of good 1 is always preferred to less, and if less of good 2
is always preferred to more, then indifference curves
(a) slope downward.
(b) slope upward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B
(c) may cross.
(d) could take the form of ellipses.
(e) None of the above.

5. In Professor Meanscore’s class, the first midterm exam and the second midterm exam are
weighted equally toward the final grade. With the first midterm’s score on the horizontal axis,
and the second midterm’s score on the vertical axis, indifference curves between the two exam
scores are
(a) L-shaped with lines extending upward and to the right.
(b) L-shaped with lines extending downward and to the left.
(c) parabola shaped.
(d) straight lines with slope −1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D
(e) straight lines with slope 2.

6. If we know that I prefer 6 apples and 1 orange to 5 apples and 2 oranges, what do we know
about my preferences?
(a) they are transitive
(b) they are complete
(c) they are convex
(d) they obey the Law of Demand
(e) none of the above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E

7. Wanda Littlemore’s utility function is U (x, y) = x + 46y − 2y 2 . Her income is $135. If the
price of x is $1 and the price of y is $18, how many units of good x will Wanda demand?
(a) 5
(b) 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B
(c) 12
(d) 16
(e) 0

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 8. Katie consumes positive quantities of both jam and juice. The price of jam is 10 cents per unit
and the price of juice is 5 cents per unit. Her marginal utility of jam is 5 and her marginal
utility of juice is 10.
(a) Without increasing her total expenditures on jam and juice, she could not increase her
utility.
(b) Without changing her total expenditures, she could increase her utility by consuming
more jam and less juice.
(c) Without changing her total expenditures, she could increase her utility by consuming
more juice and less jam. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C
(d) She should spend more money on both jam and juice.
(e) We can’t tell whether any of the other statements are true or false without knowing the
quantities she consumes.

9. Waldo consumes only apples and bananas and bananas are an inferior good for him. The
price of apples increases, but there is an increase in his income that keeps him on the same
indifference curve as before. (Waldo has convex preferences, and he prefers more to less of
either good.

(a) After the change, Waldo will buy more bananas and fewer apples . . . . . . . . . . . . . . . . . . . A
(b) After the change, Waldo will buy fewer bananas and more apples
(c) After the change, Waldo will buy more of both goods
(d) After the change, Waldo will buy fewer of both goods
(e) We would need to know his utility function to determine whether any of the above state-
ments are true

10. Mungoites each have two left feet and one right foot. Their preferences for left and right shoes
display perfect complementarity. Mungoites find shoes useful only in trios of two lefts and a
right. The price of each type of shoe is $10 a shoe, and Mungoites consume nothing other
than shoes. If R is the number of right shoes, a Mungoite’s Engel curve for right shoes has
the equation

(a) R = m/30. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A
(b) R = m − 10.
(c) R = 2m.
(d) R = 10m.
(e) R = m/10.

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11. Coke and Pepsi are perfect substitutes for Mr. Drinker and the slope of his indifference curves
is minus 1. One day he bought 2 cans of Coke and 20 cans of Pepsi. (The cans of both drinks
are the same size.)
(a) Coke is less expensive than Pepsi.
(b) Coke is more expensive than Pepsi.
(c) Coke and Pepsi cost the same. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C
(d) Mr. Drinker prefers Pepsi to Coke.
(e) None of the above.

12. Georgina buys only two goods. Her utility function is Cobb-Douglas. Her demand functions
have which of the following properties?
(a) Her demand for one of the two goods does not depend on income.
(b) Her demand for neither good depends on income.
(c) Her demand for each of the goods depends on income and on the prices of both goods.
(d) One of the goods is an inferior good and the other is a normal good.
(e) Her demand for each of the two goods depends only on her income and on the price of
that good itself. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E

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13. Molly’s utility function is U (x, y) = y + 2x0.5 . She has 25 units of x and 12 units of y. If her
consumption of x is reduced to 0, how many units of y would she need to be exactly as well
off as before?
(a) 32
(b) 48
(c) 37
(d) 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D
(e) None of the above

14. Bernice has the utility function u(x, y) = min{x, y}, where x is the number of pairs of earrings
she buys per week and y is the number of dollars per week she has left to spend on other
things. (We allow the possibility that she buys fractional numbers of pairs of earrings per
week.) If she originally had an income of $18 per week and was paying a price of $8 per pair
of earrings, then if the price of earrings rose to $14, the compensating variation of that price
change (measured in dollars per week) would be closest to
(a) $7.20
(b) $12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B
(c) $23
(d) $24
(e) $25

15. Mary Granola consumes apples and uglifruits. Mary’s indifference curves are kinky. When she
is consuming more apples than uglifruits, she is just willing to trade 3 apples for 1 uglifruit.
When she is consuming more uglifruits than apples, she is just willing to trade 4 uglifruits
for 1 apple. Let P1 be the price of uglifruits and P2 the price of apples. Mary maximizes her
utility subject to her budget constraint. (Hint: Sketch one of her indifference curves.)

(a) When P1 > 3P2 , she must consume only apples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A

(b) When P1 > P2 , she must consume 3 times as many apples as uglifruits
(c) When 4P1 > P2 , she must consume only uglifruits
(d) When P1 > P2 , she must consume only apples
(e) She must consume equal numbers of both.