Econ 10A Midterm #2

F14: A security that has a present value of $Y makes one payment 6 years from now. This is security's only payment. How much must this payment? Assume an annual interest rate of r.

• Y(1+r)^6

• Y/(1+r)^6

• Y/(1+r)

• Y(1+r)

F14: What is always held constant when calculating the Hicks substitution effect?

• Quanitity consumed of both goods

• Quantity consumed of exactly one good

• Utility

• The slope of the budget constraint

• None of the above

F14: For this problem, assume that a consumer's utility function is well-behaved (positive marginal utility for all consumption levels, diminishing marginal rate of substitution, strictly convex), and that consumption is always positive for each of two goods available. These goods are x and y. If y is a Giffen good, which of the following statements is true when there is an increase in the price of good y?

• For good y, the absolute value of the IE is larger than the absolute value of the SE

• The SE implies no change in the consumption of good x

• More than one of the above answers is correct

• The SE implies an increase in the consumption of good y

• The IE implies a decrease in the consumption of good y

F17: For a given individual, the weighted average of ______ elasticities equals 1. (Note: If own-price, cross-price, and income are all correct, pick "all")

• own-price

• cross-price

• income

• All of the above

F18: In an insurance market, which of the following must be true if someone fully insures?

• Consumption in the bad state must be larger than in the good

• Utility must be maximized if this person is risk loving

• The number of dollars of acciedent insurance purchased is less than the amount of the potential loss

• The probability of a loss occurring is less than one-half

• None of the above

F18: Janel’s utility function for two commodities is given by 𝑈(𝑥1, 𝑥2) = min⁡(𝑥1, 2𝑥2). She currently has $60 to spend, and the price of each commodity is $1. When the price of commodity 1 (x1) increases from $1 to $2, what can be concluded about the change in quantity of commodity 1 due to the substitution effect (SE) and income effect (IE)?

• SE is 0 and IE is negative

• SE is negative and IE is 0

• SE is negative and IE is positive

• SE is negative and IE is negative

F19: For this question, assume that indifference curves are strictly convex, consumption and leisure are normal goods, and the optimal amounts of consumption, leisure, and labor are always positive. A wage increase ______. (SE = substitution effect; IE = income effect)

• increases labor supply via the SE and decreases labor supply via the IE

• decreases labor supply via the SE and decreases labor supply via the IE

• increases labor supply via the SE and increases labor supply via the IE

• decreases labor supply via the SE and increases labor supply via the IE

• Can't tell w/o knowing the utility function

F19: A price ceiling set below the equilibrium price ______.

• will sometimes increase consumer surplus, while in other cases will decrease it

• will sometimes increase producer surplus, while in other cases will decrease it

• always reduces both consumer and supplier surpluses

• always increases consumer surplus and generates no loss to society

• always reduces producer surplus and always increases consumer surplus

F22: James is a utility-maximizer with well-behaved preferences, strictly convex indifference curves, and he considers leisure a normal good. He has $200 per week in non-wage income and 98 hours to allocate to leisure or labor per week. Suppose his wage goes down from $25 to $20 per hour and his demand for leisure increases from 60 hours per week to 70 hours per week. Which of the statement must be correct to be consistent with James’ choice?

• James' reservation wage increased

• James' reservation wage decreased

• For consumption, the substituition effect is positive

• For leisure, the income effect is larger than the substitution effect in absolute value

• For leisure, the substitution effect is larger than the income effect in absolute value

F22: Kristopher has risk-neutral preferences. Which of the following statements is correct?

• The first derivative of his utility function is negative and the second derivate is positive

• The first derivative of his utility function is positive and the second derivative is negative

• The first derivative of his utility function is positive and the second derivative is zero

• The first derivative of his utility function is positive and the second derivative is positive

• None of the above