BMIK WS 2023/2024 - MOCK EXAM

Exam date: 28th December 2023

Exercise 1:
Assume an economy in which only two consumer goods exist, 𝑥1 and 𝑥2 (with the corresponding
prices 𝑝1 and 𝑝2 ). There are in total 10 households, 5 from type 𝐴 with the corresponding utility
function 𝑈𝐴 (𝑥1 , 𝑥2 ) and 5 from type 𝐵 with the corresponding utility function 𝑈𝐵 (𝑥1 , 𝑥2 ). Both
types of households have an income of 50. The utility functions are defined as follows:
𝑈𝐴 (𝑥1 , 𝑥2 ) = 𝑥1 𝑥2

𝑈𝐵 (𝑥1 , 𝑥2 ) = 2𝑥1 + √𝑥1 𝑥2

a. Derive the demand functions for good 𝑥1 for both households and calculate the aggregated
market demand for 𝑥1 .
b. Determine market demand for 𝑥1 (when marginal utilities are the same) if households from
type A now have an income amounting to 80. Categorize commodity 𝑥1 for both types of
households as a normal or inferior commodity. What is now the price elasticity of demand?
Explain your findings.

Exercise 2:
Suppose the demand curve for a product is given by 𝑄 = 10 − 2𝑃 + 𝑃𝑎 , where 𝑃 is the price
of the product and 𝑃𝑎 is the price of another good. The price of another good is $2.00.
a. Suppose 𝑃 = $1.00. What is the price elasticity of demand? What is the cross-price elasticity
of demand? Explain the own price elasticity of demand and the cross-price elasticity of demand
in this case.
b. Suppose the price of the good, 𝑃, goes to $2.00. Now what is the price elasticity of demand?
What is the cross-price elasticity of demand? Explain the own price elasticity of demand and the
cross-price elasticity of demand in this case.
c. Base on the changes in the price elasticity of demand, what can you say about the two goods?

Exercise 3:
As the owner of a family farm whose wealth is $250,000, you must choose between sitting this
season out and investing last year’s earnings ($200,000) in a safe money market fund paying 5.0%
or planting summer corn. Planting costs $200,000, with a six-month time to harvest. If there is
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rain, planting summer corn will yield $500,000 in revenues at harvest. If there is a drought,
planting will yield $50,000 in revenues. As a third choice, you can purchase AgriCorp drought-
resistant summer corn at a cost of $250,000 that will yield $500,000 in revenues at harvest if
there is rain, and $350,000 in revenues if there is a drought.
You are risk averse, and your preference for family wealth (W) is specified by the relationship:

𝑈(𝑊) = √𝑊

The probability of a summer drought is 0.30, while the probability of summer rain is 0.70.
Which of the three options should you choose? Explain your choice.

Exercise 4: Filling the blanks

Fill in the blanks in the following questions.

1. When we move along a given demand curve, _________________are held constant.

2. Suppose that a decrease in the price of good X results in fewer units of good Y being demanded.
This implies that X and Y are _____________________.

3. Irene is a vegetarian, so she does not eat pork. That is, pork provides no additional utility to
Irene. She loves broccoli, however. If we illustrate Irene’s indifference curves by drawing broccoli
on the horizontal axis and pork on the vertical axis, her indifference curves will
be______________ lines.

4. Scott knows that he will ultimately face retirement. Assume that Scott will experience two
periods in his life, one in which he works and earns income, and one in which he is retired and
earns no income. Scott can earn $250,000 during his working period and nothing in his retirement
period. He must both save and consume in his work period with an interest rate of 10 percent on
savings. Assume that Scott decides to consume $100,000 in the work period. The money will he
have available for consumption in his retirement period is ______________ $.

5. If an increase in the interest rate lowers savings, then the income effect is
____________________ than the substitution effect.

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6. When a buyer’s willingness to pay for a good is equal to the price of the good, the buyer is
________________ between buying the good and not buying it.

7. Karen, Tara, and Chelsea each buy ice cream and paperback novels to enjoy on hot summer
days. Ice cream costs $5 per gallon, and paperback novels cost $8 each. Karen has a budget of
$80, Tara has a budget of $60, and Chelsea has a budget of $40 to spend on ice cream and
paperback novels. The only person who can afford to purchase 8 gallons of ice cream and 5
paperback novels is _________________.

8. Suppose at the consumer’s current consumption bundle the marginal rate of substitution of
cheese for wine is 1/2 bottle of wine per pound of cheese. The price of one pound of cheese is
$6, and the price of a bottle of wine is $10. The consumer should increase his consumption of
___________________, decrease his consumption of ___________________, and move to a
higher indifference curve.

9. Roxanne’s hourly wage increases from $9 to $13. Give the increase in Roxanne’s wage and
Roxanne’s labor supply curve is upward sloping, she will choose to work ___________ hours.

10. If the price elasticity of demand for a good is 2.0, then a 10 percent increase in price results
in a ___________ percent decrease in the quantity demanded.

Exercise 5: Multiple choice questions

1. Given the willingness to pay of 4 consumers as follows:
Buyer Willingness To Pay

Calvin $150.00

Sam $135.00

Andrew $120.00

Lori $100.00

If the price of the product is $122, then the total consumer surplus is:
a. $28.
b. $41.
c. $43.
d. $405.
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2. The slope of the budget constraint is all of the following except
a. the relative price of two goods.
b. the rate at which a consumer can afford to trade one good for another.
c. the marginal rate of substitution.
d. constant.

3. Assume Victoria’s indifference curves are bowed outward but her indifference curves satisfy
the other three properties of indifference curves. As Victoria moves from right to left along the
horizontal axis, her marginal rate of substitution
a. increases.
b. decreases.
c. remains constant.
d. increases, then decreases.

4. Which of the following does not affect an individual’s demand curve?

a. expectations
b. income
c. prices of related goods
d. the number of buyers

5. The labor supply curve reflects how

a. workers' decisions about the labor-leisure tradeoff respond to a change in the wage.
b. workers' decisions about the opportunity cost of labor respond to a change in the
quantity of labor supplied.
c. firms' decisions about the labor-leisure tradeoff respond to the quantity of labor
demanded.
d. firms' decisions about how the quantity of labor they hire respond to changes in their
opportunities to earn profits.

6. The flatter the demand curve through a given point, the

a. greater the price elasticity of demand at that point.
b. smaller the price elasticity of demand at that point.
c. closer the price elasticity of demand will be to the slope of the curve.
d. greater the absolute value of the change in total revenue when there is a movement
from that point upward and to the left along the demand curve.

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7. Currently you purchase ten frozen pizza per month. You will graduate from college in
December, and you will start a new job in January. You have no plans to purchase frozen pizzas
in January. For you, frozen pizzas are a(n)
a. substitute good.
b. normal good.
c. inferior good.
d. complementary good.

8. Given the four cases below, the budget constraint moves from BC-1 to BC-2.

Which of the graphs in the figure reflects a decrease in the price of good X only?
a. graph a
b. graph b
c. graph c
d. graph d

9. Suppose John and Wayne are the only two demanders of cowboy movies. Each month, John
buys six cowboy movies when the price is $10 each, and he buys four cowboy movies when the
price is $15 each. Each month, Wayne buys four cowboy movies when the price is $10 each, and
he buys two cowboy movies when the price is $15 each. Which of the following points is on the
market demand curve?
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 a. quantity demanded = 2; price = $15
b. quantity demanded = 4; price = $25
c. quantity demanded = 10; price = $10
d. quantity demanded = 16; price = $25

10. Given the graph below:

Bundle B represents a point where

a. MRSxy > Py/Px.
b. MRSxy = Px/Py.
c. MRSxy < Px/Py.
d. MRSxy > Px/Py.