ECON 8010 FINAL EXAM PREP FALL 2016

1. TRUE or FALSE and EXPLAIN: Label each statement TRUE or FALSE, and
rigorously justify your answer.

a. ___________ “For a profit-maximizing firm with a two-input, linear

homogeneous production function, the demand for labor is less wage-elastic
the more easily labor is substituted for capital.”

b. ____________ “In the standard model of labor supply, a marginal increase in

the market wage rate, ceteris paribus, unambiguously increases hours of work
for an individual who, before the wage increase, uses all of his time to
consume leisure.

2. RESTRICTIONS: Briefly explain or justify your answer.

a. Suppose that a firm’s (maximum) profit function is

π*(p,w) = p ∙ ln(p/w) – p

where p denotes the price of output and w denotes the per-unit price of
labor. What restriction must be placed on the relationship between p and
w? Why?

b. If the compensated demand for good Y is given by

Yc *(Px,Py,U) = U – (1/2) ∙ lnPy + b ∙ lnPx, what is the value of b? Why?
3. Suppose that an individual’s preferences are given by the indirect utility
function

V ( Px , Py , M )  [( Px1 / 2  Py1 / 2 ) 2 ] / M

a. Derive the individual’s uncompensated demand functions X* (Px,Py,M)

and Y* (Px,Py,M).

b. What is the individual’s direct utility function U(X,Y)?

4. Suppose that a consumer’s preferences are represented by the expenditure

function M*(Px, Py, U) = 2Px1/2Py1/2 + PyU, where Px and Py are the per-unit
prices of X and Y, respectively, and U is utility.

a. Derive the compensated demand functions for X and Y.

b. What is the associated (direct) utility function U(X,Y)?

5. A consumer is observed to purchase the bundle (X0, Y0) = (2, 3) when per-unit
prices are (Px0, Py0) = (2, 1). She is subsequently observed to purchase the
bundle (X1, Y1) = (1, 2) when per-unit prices are (Px1, Py1) = (1, 2). Is her
behavior consistent with the weak axiom of revealed preference? Why or why
not?