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problem set 6

The document is a problem set for a Microeconomics course, focusing on concepts such as compensating and equivalent variations in consumer behavior. It includes short answer questions regarding utility functions and multiple-choice questions related to consumer surplus and welfare measures. The due date for the assignment is December 21, 2022, at 8:00 PM.

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5 views

problem set 6

The document is a problem set for a Microeconomics course, focusing on concepts such as compensating and equivalent variations in consumer behavior. It includes short answer questions regarding utility functions and multiple-choice questions related to consumer surplus and welfare measures. The due date for the assignment is December 21, 2022, at 8:00 PM.

Uploaded by

kan000911
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Microeconomics I

Fall 2022 Crystal Wong


Problem Set 6
(Due 21December 8:00pm, Wednesday)

Short Questions

1) Ian views playing Wartcraft and drinking soda as perfect complements (one soda with one
hour of playing Wartcraft). Currently, sodas are $1 each and Wartcraft costs $1 per hour. Ian has
$12 of income.

a. Compute Ian's Compensating Variation if the price of Wartcraft rises to $2.

b. Compute Ian's Equivalent Variation if the price of Wartcraft rises to $2.

2) A consumer has the quasi-linear utility function

1
𝑈(𝑞1 , 𝑞2 ) = 8𝑞12 + 𝑞2

Assume 𝑝2 = 1 and Y = 100 where 𝑝2 stands for the price of good 2 and Y stands for income.
Find the consumer's compensating and equivalent variations for an increase in 𝑝1 from 1 to 2.

3) If there is Cobb-Douglas utility, compensating and equivalent variation are the same. True or
False? Explain your answer briefly.

Multiple Choice Questions

1) Joe's demand for spring water can be represented as p = 10 - Q (where p is measured in


$/gallon and Q is measured in gallons). He recently discovered a spring where water can be
obtained free of charge. His consumer surplus from this water is
A) $0.
B) $50.
C) $100.
D) unknown based upon the information provided.

1
2) The above figure shows the market demand curve for telecommunication while driving one's
car (time spent on the car phone), which is linear. The current price is 35¢ per minute. If the
price were to increase by ten cents per minute, consumer surplus would
A) fall to $820.
B) fall by $84.
C) fall by $58.
D) fall to $369.

3) The compensation variation and equivalent variation will be closer to each other when
A) the income elasticity is greater.
B) the budget share is greater.
C) the price change is smaller.
D) the income elasticity is smaller.

4) Suppose a victim of an accident brings the injurer to court. You are hired to determine the
amount of damages. You are specifically asked to find a measure of the amount of money
needed to restore the victim to the position he was in prior to the accident. What welfare measure
will provide the most accurate measure of this amount?
A) compensating variation
B) equivalent variation
C) consumer surplus
D) the loss of utility

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