Microeconomics

MICROECONOMICS Professor F. S. Lee

(ECON 302)

Spring 2009

EXAM I

I. Short Answer Questions: answer THREE of the following questions

1. Using the production possibility frontier, show that if a society decides to produce more capital goods relative to consumption goods in year 1, then in year 2 there will be more consumption goods.

2. How are economic theories created in neoclassical economics?

3. What is lexicographic preference ordering?

4. What are the implications for a consumer’s preferences and her/his indifference curves if the axiom of transitivity does not hold?

5. What is a strongly separable utility function?

6. From a heterodox perspective, the household is rarely indifferent when considering the benefits of two bundles of goods. Why?

7. What is the implication for utility maximization if the axiom of dominance does not hold?

II. Consumer Demand Curve: answer ALL the questions

1. Consider a consumer with the following utility function: U = 3y1y2 + 5

a. Assume y2 = 1, derive the marginal utility schedule for y1. What direction is it

moving?

b. Derive indifference curves for U = 23 and for U = 59.

c. Assume money income = $18.00, p1 = $6.00, and p2 = $2.00, find the consumer

equilibrium position using the above indifference curves.

d. Assume money income = $18.00, p1 = $2.00, and p2 = $2.00, find the consumer

equilibrium position using the above indifference curves.

e. Using the results from (c) and (d):

(1) derive the consumer demand curve for good 1.

(2) how much was the increase in demand for good 1 due to the substitution effect? How much was due to the income effect?

(3) determine whether goods 1 and 2 are substitutes, complements, or

independents.

(4) derive the price elasticity of demand and state whether it is...