UCLA

Economics 11 Fall 2013

Professor Mazzocco
MIDTERM 1, Version 1

NAME: _______________________________________ID:____________________

TA:__________________________________________________________________

Part I: Multiple Choice Questions (3.5 points each):

1.

Which of the following statement is true about the function f ( x ) ln( 2 x 3 )

where x>0?
a. x=2 is point of maximum
b. x=2 is a point of minimum
c. x=8 is point of maximum
d. none of the above

2.
If an individuals indifference curve map does not obey the assumption of a
diminishing MRS, then
a. the individual will always be at a corner.
b. the individual will always buy more of good X.
c. the first order conditions are not sufficient to find the optimal consumption
bundle
d. the budget constraint cannot be tangent to an appropriate indifference curve.

x3
,
8

3.
Which of the following utility function can be solved using the Lagrangian
methods?
a. U(X,Y) = 11X+25Y
b. U(X,Y) = min(X,Y)
c. U(X,Y) = max(2X,Y)
d. U(X,Y) = (X0.5 + Y0.5)2

4.
Suppose the utility function is given by U(X,Y) = 3 5 , which of the following
statement about the utility maximization problem is correct?
a. The optimal total spending on good X is one-third of total income.
b. When the price of X increases and price of Y is unchanged, the total consumption
of commodity Y increases.
c. The optimal consumption level is the same if the utility function is in the form of
U(X,Y) = 5ln(X) + 3ln(Y).
d. When the price of X and Y both doubles, the optimal consumption bundle remains
the same.

5.
An individuals utility depends on his consumption of good X and good Y.
Suppose that all prices and income double. What will happen to the Marshallian
demands?
a. They will both double.
b. They will both be reduced by half.
c. There will be no effect.
d. Uncertain.

6.
Mr. Fox likes 3 chicken drumsticks (D) as much as 2 chicken thighs (T) (they are
perfect substitutes). Suppose that he is now consuming 2 Ds and 2 Ts, and the prices are
= = 5. His income is 20. What should he do to maximize his utility?
a. Consume more D and less T.
b. Consume more T and less D.
c. His utility is already maximized.
d. Consume more D and more T.

7.
Alice has preferences over trips to Wonderland (W) and trips to London (L). The
following list shows all feasible bundles that Alice can consume in a year:
A=(WA,LA)=(1,2)
B=(WB,LB)=(2,1)
C=(WC,LC)=(3,0)
If Alices preferences are given by: B is indifferent to C, B is strictly preferred to A
and A is strictly preferred to C, then:
a. A function that represents Alices preferences is U=2W+L.
b. A function that represents Alices preferences is U=W+2L.
c. There exists a utility function different from the ones mentioned above that
represents Alices preferences.
d. None of the above.

8.
An individual has a utility function for ipads (X) and ipad smart covers (Y) of the
form U(X, Y) = min(X,Y). His or her expenditure function is given by
a.

E p x p y U .

b.

c.

E 2 p x p y U .

d.

U
px p y .

py
U

9.
John spends his income buying books (B) and music CDs (M). The price of each
book is 10 Dollars; the price of each cd is 5 dollars. His utility is given by: U=lnB+2lnM.
What is the minimum income John needs to obtain a utility level equal to ln(16)?
a. 20
b. 30
c. 40
d. 50

10.
Ken has a utility function for tennis rackets (X) and tennis balls (Y) of the form
U(X,Y)=min(4X,2Y). His Hicksian demand for X is given by

a. = 4

b. = 2
c. =

d. =

Part II: Essay Questions

Question 1 (25 Points)

The Mad Hatter only consumes two goods: bowler hats (B) and top hats (T). Although he
is mad, his preferences satisfy all the axioms of preferences and can be represented by the
following utility function:

U (B ,T ) (B 1 / 2 2T 1 / 2 )2
His income is I, the price of the bowler hats is PB and the price of the top hats is PT.
(a) Write the Mad Hatters utility maximization problem. (4 points)
Solution:

max
s .t .

(B 1 / 2 2T 1 / 2 )2

PB B PTT I

(b) Obtain his Marshallian demands for bowler hats and top hats. (8 points)
Solution:
Using the tangency condition:

MRS

PB
MU B
P
P
B 1 / 2

B
B
1 / 2
PT
MU T
PT
PT
2T

P
B T T
2PB

and substituting in the budget constraint:

T *(PT ,PB ,I )
B *(PT ,PB ,I )

4PB I
4PB PT PT2

PT I
PB PT 4PB2

(c) Show whether the demand for top hats is increasing, decreasing or does not change
with respect to the price of bowler hats and with respect to income. (7 points)
Solution:
T *(PT ,PB ,I )
4I

PB
4PB PT

T (PT ,PB ,I )
4PB

0
I
4PB PT PT2
*

(d) Find the Mad Hatters indirect utility function. (6 points)

Solution:
2

1/2
1/2

PT I
4PB I
*
*

V (PT ,PB ,I ) U (B ,T )
2
2
P P 4P 2
4
P
P

P
B
T
B T
B T

Question 2 (40 Points)

Mary and Kate are 5 years old twin sisters. They both like to eat chocolates (C) and play
with toys (T). Mary likes more to eat chocolate than play with toys and Kate likes more to
play with toys than to eat chocolate. They therefore have different utility functions that
take the following form:
Mary's utility function: U MARY (C, T ) C 2T
Kate's utility function: U KATE (C, T ) T 2C
(a) For a given amount of I , pC and pT find Mary's Marshallian demand functions for C
and T. (6 points)
Solution:

MARY
CT

MRS

MU CMARY 2CT pC

2
MU TMARY
C
pT

pC C pT T I

CpC
I
2 pT

pC C pT

CpC
2 pT

C MARY *

2I
3 pC

; T MARY *

I
3 pT

(b) Mary won 10 dollars from a lottery. What is Mary's level of utility if she spends all of
her money buying chocolates and toys? Her income is still I, the price of each chocolate
is still pC , and the price of each toy is still pT . (5 points)
Solution:

2I x I x
22 I x


*)
33 pC2 pT
3pC 3pT
2

MARY

* U

MARY

(C

MARY

*,T

MARY

(c) For a given amount of pC , pT and U find Kate's Hicksian demand functions for C
and T. (6 points)
Solution:

MRS

KATE
CT

KATE

MU CKATE
T2
p

C
KATE
2CT
pT
MU T

T C U
2

2CpC

pT

1/3

KATE
C

U p2
* 2 T2
2 p
C

KATE
T

2CpC

pT

C U

2U pC
*
p
T

22C 3 pC2

pT2

1/3

For the rest of the exercise, use pC 10 , pT 30 , and I 80

(d) Kate was really sad because she did not won the lottery. Because of that her mother
decided to give her some additional income. What is the amount of dollars in addition to
her income I that Kate needs to achieve the same level of utility as Mary in part b)? The
price of each chocolate is still pC and the price of each toy is still pT . (8 points)
Solution:

Plug Marys indirect utility function into Kates expenditure function,

E pC h

MARY
C

* p h

MARY
T T

22(I x )3 2

pT pC
3 2
3 pC pT
E
22

I x pT

E
3 pC

1/3

U pT2
* pC 2 2
2 p
C

1/3

1/3

2U pC
pT
pT

22(I x )3
2
2

p
p
C
T
33 pC2 pT

2I x pT

3
pC

p
Kate need an additional amount of T
pC
49.8.

1/3

1/3

U pT2 pC

22

1/3

2U pC pT2

(I x )3 pT

33 p C

1/3

23(I x )3 pT

33 p C

1/3

x I . Plug in the numbers we get

Mary has been consuming so much chocolate that she has developed too many cavities.
Her mother therefore decides to impose a tax on each unit of chocolate she consume (a
sale tax). She decides that the total revenues from the tax should be equal to $20.
(e) Find the tax that the mother will impose on each unit of chocolate. Marys income is
still I+x, the price of each chocolate before the tax is still pC , and the price of each toy is
still pT . (9 points)
Solution:
Use the condition that total revenue equals to $20,

2I
R
3pC

pC R

1/3

1/3

p
I x T
pC

1/3

2
I x R
3

Plug in the numbers, the tax equals to $5

(f) Find the optimal consumption bundle for the Mary after the introduction of the tax and
his level of utility. (6 points)

1/3

Solution:
After the introduction of taxes

C MARY *

2(I x )
3(pC )

So C*=4, T*=1

T MARY *

I x
3pT