1CK90 – Microeconomics – Midterm Practice Exam

Time: 60 minutes
ANSWER FORM

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Instructions:
1. For each question there is only 1 correct answer.
2. Put a cross (x) in the cell that corresponds to your answer in the table below. Two or
more answers for a question is considered as a wrong answer.
3. Do not separate exam papers.
4. Both the answer form and question bank must be handed in at the end.
5. Two sheets for scratch work is provided within the question bank.
6. No questions will be entertained in the exam.

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1. The following table shows the prices and consumption of a consumer at three different
points in time. Is the behavior of the consumer consistent with WARP and SARP?
--- 𝑝1 𝑝2 𝑥1 𝑥2
A 2 1 1 2
B 2 2 2 1
C 1 2 2 2

a. It is consistent with WARP, but not SARP

b. It is consistent with WARP and SARP
c. It is inconsistent with WARP and SARP
d. It is inconsistent with WARP, but consistent with SARP

2. Find the marginal rate of substitution of the utility function 𝑈(𝑥, 𝑦) = 𝑥 − (4 − 𝑦)2.
𝑥
a. 𝑀𝑅𝑆 = 2(4−𝑦)
−𝑥
b. 𝑀𝑅𝑆 = 2(4−𝑦)
−1
c. 𝑀𝑅𝑆 = 2(4−𝑦)
1
d. 𝑀𝑅𝑆 = 2(4−𝑦)

3. Which of the following is true about well-behaved indifference curves?

a. They are concave
b. Mixtures of bundles are not preferred to the bundles themselves
c. The marginal rate of substitution is always negative
d. They have a satiation point

4. Kasper spends all his money to consume goods 𝑥 and 𝑦 with the utility function of the
form 𝑈(𝑥, 𝑦) = 𝑥𝑦. Initially, 𝑝𝑥 = €4 and 𝑝𝑦 = €2. His income is 𝑚 = €288. If the
price of 𝑥 increases to 𝑝𝑥 = €9, determine the Hicks substitution effect of this change
in price on the consumption of good 𝑥.
a. 36
b. 26
c. −10
d. −12

5. Given the utility function 𝑈(𝑥, 𝑦) = 2𝑥 2 + 3𝑦 2 , income 𝑚 = 90 and the prices 𝑝𝑥 =

3, 𝑝𝑦 = 6; how much of good x will be consumed?

90
a. 11
b. 30
c. 45
120
d. 11
6. A giffen good is also

a. an inferior good
b. an ordinary good
c. a normal good
d. a luxury good

7. The demand for a product is given by 𝐷(𝑝) = 20 − 2𝑝 and the supply is 𝑆(𝑝) = 3𝑝.
Find the equilibrium price and quantity sold in the market.

a. Price of 5, sales of 10
b. Price of 4, sales of 12
c. Price of 5, sales of 15
d. Price of 20, sales of 1

8. If the utility function of a consumer is quasi-linear, then which of the following is true?

a. Compensating Variation = Equivalent Variation

b. Compensating variation = 2 ∗ (Equivalent Variation)
c. 2 ∗ (Compensating variation) = Equivalent Variation
d. None of the above

9. The demand function for pineapple juice is given by 𝐷(𝑝) = (3𝑝 + 1)−4 . What is the
price elasticity of demand at price 𝑝?

12𝑝
a. (3𝑝+1)
4𝑝
b. (3𝑝+1)
4𝑝
c. (− 3𝑝+1)
12𝑝
d. (− 3𝑝+1)

10. Which of the following is a monotonic transformation of the utility function 𝑈(𝑥, 𝑦) =
𝑥2𝑦3?

a. 2 ln 𝑥 + 3 ln 𝑦
b. 𝑥4𝑦6
c. 10𝑥 2 𝑦 3
d. All of the above
11. Your utility for daily leisure hours (𝐿) and consumption (𝐶) is given by 𝑈(𝐶, 𝐿) = 𝐶𝐿.
Your job pays you €20 per hour as wage and your family provides you with an income
of €100 per day. You have 16 hours in the day that you can spend on leisure or labor.
How many hours in the day will you work?

a. 10.5
b. 210
c. 6.5
d. 5.5

12. Consumer surplus is

a. equivalent to the value of the good or service in its intended use
b. equivalent to value in exchange
c. the difference between the total expenditure and what consumers have to pay
per unit
d. the difference between what consumers would be willing to pay and what they
have to pay

𝑚
13. The demand function for oil is given by 𝑥 ∗ = 10𝑝 and the income of the consumer
𝑥
is 𝑚 = 200. If the price of oil changes from €10 to €8, what is the Slutsky substitution
effect of this change in price on the consumption of oil?
a. 2.45
b. 0.45
c. 0.55
d. 2.55

0.2𝑚
14. Your demand function for buying milk is given by 𝑥 ∗ = . Currently the price of milk
𝑝𝑥
is 𝑝𝑥 = €2 and your income 𝑚 = €60. The government is considering to impose a
quantity tax on milk of €1. How much milk tax will the government earn from you if
this tax is imposed?
a. €0.4
b. €4.4
c. €4
d. €6

15. Atelier Max manufactures shiny copper coat hangers. He finds that the demand for his
coat hangers as a function of their price is 𝐷(𝑝) = 1600 − 8𝑝. How much should he
charge for these hangers to maximize his revenue?
a. 200
b. 100
c. 50
d. 400
16. Coffee and milk behave as complements for a certain consumer. This means that when

a. price of coffee increases, demand for milk increases

b. price of coffee decreases, demand for milk decreases
c. price of coffee increases, demand for milk decreases
d. price of coffee increases, there is no change in demand for milk

17. Anna is very particular in the way she consumes her whiskey (good x) with ice cubes
(good y). For every drink of whiskey, she will add exactly 2 ice cubes. A utility function
that describes her preferences is:

a. 𝑈(𝑥, 𝑦) = 2𝑥 + 𝑦
b. 𝑈(𝑥, 𝑦) = min(𝑥, 𝑦)
c. 𝑈(𝑥, 𝑦) = min(2𝑥, 𝑦)
d. 𝑈(𝑥, 𝑦) = min(𝑥, 2𝑦)

18. Calculate the Paasche quantity index of the current year relative to the base year given
the following information:
Base Year: 𝑝1 = 3, 𝑝2 = 1, 𝑥1 = 5, 𝑥2 = 15
Current Year: 𝑝1 = 1, 𝑝2 = 2, 𝑥1 = 25, 𝑥2 = 25

15
a. 7
10
b. 3
3
c. 4
7
d. 6

19. Laura enters the market for goods 𝑥 and 𝑦 with the endowment (𝜔𝑥 , 𝜔𝑦 ). Before the
price of good 𝑥 dropped, she was a net buyer of good 𝑥. For Laura, good 𝑥 is a normal
good. When the price of good 𝑥 drops,

a. Laura will stay a net buyer of good 𝑥

b. Laura will turn into a net seller of good 𝑥
c. nothing can be said about her new consumption pattern
d. good 𝑥 will become a giffen good for Laura

20. Jack Donaghy’s utility function is 𝑈(𝑥, 𝑦) = 3𝑥 2 + 10𝑥𝑦. What is his marginal utility
with respect to good 𝑦 when 𝑥 = 1 and 𝑦 = 2?

a. 10
b. 26
c. 13
d. 29
21. Commodity 1 (on the x-axis) is a “good” and Commodity 2 (on the y-axis) is a “bad”.
The slope of the indifference curve for these two goods will be

a. Negative
b. Positive
c. 0
d. ∞

22. Two consumption choices made at different times by the same consumer are given
below. When the prices were (𝑝𝑥 , 𝑝𝑦 ) = (5,3), the consumer chose the
bundle (𝑥, 𝑦) = (4,7). When the prices were (𝑝𝑥 , 𝑝𝑦 ) = (𝑎, 𝑏), the consumer chose
the bundle (𝑥, 𝑦) = (5,5). If it is known that the consumer’s choice is inconsistent with
the Weak Axiom of Revealed Preference (WARP), then what is the relationship
between 𝑎 and 𝑏?

a. 𝑎>𝑏
b. 𝑏>𝑎
c. 𝑎 > 2𝑏
d. 2𝑏 > 𝑎

23. If the percentage marginal increase in the price of a good is equal to the percentage
marginal decrease in the quantity demanded of that good, then the demand for that
good with respect to its price is:

a. Infinitely elastic
b. Inelastic
c. Unit elastic
d. Cannot say with given information

24. A consumer enters a market of two goods 𝑥 and 𝑦. If the demand function of this
𝑚
consumer for the good 𝑥 is given by 𝑥 ∗ = 𝑝 +𝑝 , what can you say about the good 𝑥?
𝑥 𝑦

a. Good 𝑥 is an inferior good and an ordinary good

b. Good 𝑥 is a normal good and a giffen good
c. Good 𝑥 is a normal good, an ordinary good and substitutes with good 𝑦
d. Good 𝑥 is a normal good, an ordinary good and complements with good 𝑦
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