UNIVERSITY OF ILLINOIS- Department of Economics

Economics 302

EXAM 01

This is Form A

EXAM INSTRUCTIONS

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Multiple Choice

1. Suppose the own-price elasticity of demand for ice cream is -1.5. Which of
the following is true

A. A decrease in the price of ice cream will increase revenue on ice

cream

B. A increase in the price of ice cream will increase revenue on ice cream

C. Revenue is maximized at this price

D. not enough information

2. Nestle and other companies announced that they will use only natural Vanilla
in fives year. Which of the following is true for the vanilla market

A. contraction of demand for vanilla, price of vanilla decrease

B. expansion of demand for vanilla, price of vanilla increases

C. expansion of supply for vanilla, price of vanilla decrease

D. expansion of demand for vanilla, price of vanilla decrease

E. contraction of supply for vanilla, price of vanilla increase

3. Lina’s utility function is U (X, Y ) = X 2 + Y . Which of the following represents

her marginal utility of good X?

A. M Ux =2X+Y

B. M Ux =2X

C. M Ux = X 2 + Y

D. M Ux =Y

2X
E. M Ux = Y

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4. The own-price elasticity of wheat is -1.5. The cross-price elasticity of rice
with respect to wheat is 2.0. If the price of wheat increases by 10%. Which
of the following statement is true?

A. quantity demanded of rice will not change

B. quantity demanded of rice will decrease by 20%

C. quantity demanded of rice increases by 20%

D. quantity demanded of rice will increase by 30%

E. quantity demanded of rice will decrease by 30%

5. Dan solved a few utility maximization problems where a consumer is choos-

ing between potatoes and a numeraire good and found the Engle curve for
potatoes is downward sloping. Which of the following statement is true

A. potato is a normal good

B. income elasticity for potato is negative

C. potato and the numeraire good are substitutes

D. none of the above

6. Which of the following is not an assumption for a rational consumer’s pref-

erence

A. perfection

B. transitivity

C. completeness

D. more is better

E. diminishing marginal rate of substitution

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7. The demand for wheat is Qd = 3500 − 250P . The supply for wheat is Qs =
1800 + 240P . Suppose the government imposes a price ceiling at $4, What is
the equilibrium quantity for wheat?

A. QeW heat =2500

B. QeW heat =2632.65

C. QeW heat =2760

D. QeW heat =1800

8. Link’s demand towards mushrooms is given by QD = 50 − 25P . Catherine’s

demand towards mushroom is given by QD = 2000 − 15P , Suppose the market
demand is the total demand from Link and Catherine. What is the slope of
the inverse market demand curve when the price of mushrooms is equal to
$1

A. -0.06

B. -0.025

C. -0.04

D. -40

9. Suppose the government reduces sales tax for electric cars. Which of the
following will be true for the equilibrium price and quantity of the traditional
car market

A. Price of traditional cars falls, quantity of traditional cars increases

B. Price of traditional cars falls, quantity of traditional cars falls

C. Price of traditional cars falls, quantity of traditional cars may increase or

decrease

D. Price of traditional cars increases, quantity of traditional cars falls

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10. Suppose the price of pizza(Good X) and the price of movies(Good Y) both
decrease by 50%, which of the following will be not true

A. the X-intercept of the new budget line will be closer to the origin

B. M ktRSxy will decrease by 50%

C. Both A and B

D. None of the above

11. Which of the following is true about Giffen goods

A. Giffen goods are inferior goods

B. Giffen goods have downward sloping demand curves

C. the income effect of giffen goods will be larger than the substitution effect

D. all of the above

E. Both A and C

12. Max has $150 of income. The local fruit shop offers a bag of apples(good X)
at $6.00 and a whole watermelon(Good Y) at $7.00. Suppose the local fruit
shop is offering a buy one bag get the second bag 50% off on apples. What
is the X intercept of Max’s budget line

A. 25

B. 33

C. 22

D. 36

E. none of the above

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13. Which of the following is a positive statement?

A. the price of video card will decrease if the value of bitcoin keeps
going up

B. The low-income group will suffer, if the new health care bill is passed

C. Investors should follow sun-spot counts closely

D. Harry Potter should be a Slytherin

14. Ben have 10 cones and 10 cylinders, After giving up 2 cones to in exchange
for 1 cylinder, he is as happy as before. Suppose Ben’s preferences satisfy
diminishing marginal rate of substitution, an assumption we made about
rational consumers. How many cones Ben may be willing to give up in
exchange for 1 cylinder after the trade.

A. 1.5

B. 2

C. 3

D. 3.5

15. Suppose the demand function for Croissant is given by Qd = 1500 − 200P .
which of the following is true

A. revenue will be maximized at $P=2

B. the choke price is $7.5

C. the reservation price at the 1000th unit is 2.0

D. the marginal cost the 1000th unit is 2.5

E. B and D

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 Free Response

16. The following supply and demand curves describe the market for natural gas
per thousand cubic feet in 2005-2007.

Supply :Qsgas = 15.9 + 0.72Pgas + 0.05Poil

Demand :Qdgas = 0.02 − 1.8Pgas + 0.69Poil

Assume the price of oil is $50

(a) Write down the inverse supply functionPgas = 1.389Qgas − 25.56

(b) Determine the marginal cost of the first cubic feet of natural gas -24.171 or 0

(c) Calculate the equilibrium quantity for gas 23

(d) Suppose the government imposes a $3.00 price ceiling on natural gas. Determine
whether there would be a shortage or surplus for natural gas. Calculate the quantity
of the shortage or surplus

i. Surplus:

ii. Shortage: 8.56

(e) Calculate the cross-price elasticity of demand of natural gas with respect to oil after
the introduction of the price ceiling 1.678

17. Bill has a budget of $100.Bill’s utility function towards burgers(good X), and
movies(Good Y) is given by

U (X, Y ) = X 0.4 Y 0.6

2Y
(a) Write down the equation for Bill’s Marginal Rate of Substitution(M RSxy ) M RSxy = 3X

Page 6 of 11
 (b) Suppose The price of burgers(Good X) is $2.00 per unit and the price of movies(good
Y) is $5. how many burgers(Good X) will Bill consume 20

(c) Write down the demand function of burgers(Good X) for BillQd (Px ) = 40/Px

18. Mika’s utility function towards brown rice(5 lb)(Good X) and white rice(10
lb) (Good Y) is given by
U (X, Y ) = X + 2Y

The local supermarket offers a bag of brown rice(5 lb)(Good X) at $4 and a

bag of white rice (10 lb)(Good Y) at $6. Mika has a budget of $60

(a) Determine the quantity of brown rice(5 lb)(Good X) Mika would purchase when
she maximizes utility subject to her budget constraint 0

(b) Suppose Mika gets a $20 food stamp towards brown rice(5 lb)(Good X) from the
government welfare program. Determine the quantity of brown rice(5 lb)(Good X)
Mika would purchase now 5

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19. Luke’s utility function is given by

U (X, Y ) = XY + 4Y

Luke is choosing between pizza(Good X) and movies(Good Y). The price for
pizzas is $10 and the price for movies is $5. Luke’s budget line is given by B1.
He chooses bundle R(X=0.5,Y=9) as his utility maximizing bundle. Suppose
the price of pizza decreases to $5 each. He chooses bundle S(X=3,Y=7) as
his utility maximizing bundle under the new prices.

12
11
10
9
R
8
Movie(Good Y)

S
7
6
5
4 B2
3
2
1 B1
0
0 1 2 3 4 5 6
Pizza(Good X)

(a) Graph the compensated the budget constraint label it B3. Label the optimal bundle
under the compensated budget line O and approximate the optimal consumption
of pizza 2.364 under the compensated budget line.

Page 8 of 11
 Solution:
12
11
10
9
R
8
Movie(Good Y)

S
7
6
O(2.36,6.36)
5
4 B2
3
2
1 B1
0
0 1 2 3 4 5 6
Pizza(Good X)

(b) Determine the total effect of the price decrease on Luke’s consumption of Pizza
2.5 (make sure you include the correct sign)

(c) Determine the income effect of the price decrease 0.636 (make sure you in-
clude the correct sign)

(d) Determine the substitution effect of the price decrease 1.864 (make sure you
include the correct sign)

(e) plot a price-consumption curve for pizza on the graph

Solution:

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 12
11
10
9
R
8
Movie(Good Y)

S
7
6
5
4 B2
3
2
1 B1
0
0 1 2 3 4 5 6
Pizza(Good X)

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scratch paper

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