Question 1

When prices are ($4, $2), Tomoko chooses the bundle (9, 18), and when prices are ($1, $2), she chooses the bundle (8, 14).

Accepted Answer

A)  The bundle (8, 14) is revealed preferred to the bundle (9, 18) and she does not violate WARP. 
B)  She violates SARP but not WARP. 
C)  The bundle (9, 18) is revealed preferred to the bundle (8, 14) and she does not violate WARP. 
D)  She violates WARP. 
E)  None of the above. 
A)  The bundle (8, 14) is revealed preferred to the bundle (9, 18) and she does not violate WARP. 
B)  She violates SARP but not WARP. 
C)  The bundle (9, 18) is revealed preferred to the bundle (8, 14) and she does not violate WARP. 
D)  She violates WARP. 
E)  None of the above.

Question 2

At prices (p1, p2) = ($4, $1), George buys the bundle (x1, x2) = (10, 20). At prices   = ($1, $4), he buys the bundle   = (4, 14). At prices   , he buys the bundle   = (20, 10). If his preferences satisfy the strong axiom of revealed preferences, then it must be that

Accepted Answer

A)  101 > 8p2. 
D)  =. 
E)  None of the above. 
A)  101 > 8p2. 
D)  =. 
E)  None of the above.

Question 3

Hillary has an initial endowment of $500 and is interested in two things: how many visits she can make to the doctor and how much money will be left over to spend on other things. When a trip to the doctor costs $60, Hillary sees the doctor 3 times. After health care reform, a visit to the doctor will cost $10 but her taxes will rise by $170.

Accepted Answer

A)  Hillary will be made better off by health care reform. 
B)  Hillary violates the Weak Axiom of Revealed Preference. 
C)  We cannot tell how health care reform will affect Hillary. 
D)  Hillary will be made worse off by health care reform. 
E)  Hillary violates the Strong Axiom of Revealed Preference. 
A)  Hillary will be made better off by health care reform. 
B)  Hillary violates the Weak Axiom of Revealed Preference. 
C)  We cannot tell how health care reform will affect Hillary. 
D)  Hillary will be made worse off by health care reform. 
E)  Hillary violates the Strong Axiom of Revealed Preference.

Question 4

When the prices were ($5, $1), Vanessa chose the bundle (x, y) = (6, 3). Now at the new prices, (px, py), she chooses the bundle (x, y) = (5, 7). For Vanessa's behavior to be consistent with the weak axiom of revealed preference, it must be that

Accepted Answer

A)  4py x. 
B)  px y. 
C)  5py x. 
D)  py = 5px. 
E)  None of the above. 
A)  4py x. 
B)  px y. 
C)  5py x. 
D)  py = 5px. 
E)  None of the above.

Question 5

The Laspeyres price index differs from the Paasche price index because the Laspeyres index holds prices constant and varies quantities while the Paasche price index holds quantities constant and varies prices.

Accepted Answer

A) True 
 B)False

Question 6

It follows from the weak axiom of revealed preference that if a consumer chooses x when he could afford y and chooses y when he could afford x, then his income must have changed between the two observations.

Accepted Answer

A) True 
 B)False

Question 7

The strong axiom of revealed preference says that if a consumer bought x when he could have afforded y and bought y when he could have afforded z, then he will buy x whenever he can afford z.

Accepted Answer

A) True 
 B)False

Question 8

Maria consumes strawberries which cost her 10 pesos a box and bananas which cost her 9 pesos a bunch. With her income of 192 pesos she buys 12 boxes of strawberries and 8 bananas. Daphne, with an income of 170 shillings, consumes strawberries at a cost of 6 shillings each and bananas at a cost of 12 shillings each. Assuming their preferences are identical,

Accepted Answer

A)  Maria would prefer Daphne's consumption bundle to her own. 
B)  Daphne would prefer Maria's consumption bundle to her own. 
C)  they would both be indifferent between their own bundles and the other's. 
D)  each prefers her own bundle to the other's. 
E)  we can't make any of the above statements without more information. 
A)  Maria would prefer Daphne's consumption bundle to her own. 
B)  Daphne would prefer Maria's consumption bundle to her own. 
C)  they would both be indifferent between their own bundles and the other's. 
D)  each prefers her own bundle to the other's. 
E)  we can't make any of the above statements without more information.

Question 9

Jose consumes rare books which cost him 8 pesos each and pieces of antique furniture which cost him 10 pesos each. He spends his entire income to buy 9 rare books and 11 pieces of antique furniture. Nigel has the same preferences as Jose, but faces different prices and has a different income. Nigel has an income of 162 pounds. He buys rare books at a cost of 4 pounds each and pieces of antique furniture at a cost of 11 pounds each.

Accepted Answer

A)  Nigel would prefer Jose's bundle to his own. 
B)  Jose would prefer Nigel's bundle to his own. 
C)  Neither would prefer the other's bundle to his own. 
D)  Each prefers the other's bundle to his own. 
E)  We can't tell whether either would prefer the other's bundle without knowing what quantities Nigel consumes. 
A)  Nigel would prefer Jose's bundle to his own. 
B)  Jose would prefer Nigel's bundle to his own. 
C)  Neither would prefer the other's bundle to his own. 
D)  Each prefers the other's bundle to his own. 
E)  We can't tell whether either would prefer the other's bundle without knowing what quantities Nigel consumes.

Question 10

If all prices increase by 20%,

Accepted Answer

A)  the Paasche price index increases by more than 20% and the Laspeyres price index increases by less than 20%. 
B)  the Laspeyres price index increases by more than 20% and the Paasche price index increases by less than 20%. 
C)  both the Paasche price index and the Laspeyres price index increase by more than 20%. 
D)  both the Paasche price index and the Laspeyres price index increase by exactly 20%. 
E)  both the Paasche price index and the Laspeyres price index increase by less than 20%. 
A)  the Paasche price index increases by more than 20% and the Laspeyres price index increases by less than 20%. 
B)  the Laspeyres price index increases by more than 20% and the Paasche price index increases by less than 20%. 
C)  both the Paasche price index and the Laspeyres price index increase by more than 20%. 
D)  both the Paasche price index and the Laspeyres price index increase by exactly 20%. 
E)  both the Paasche price index and the Laspeyres price index increase by less than 20%.

Question 11

In 1991, good x cost $5 and good y cost $1. They now cost $9 and $5 respectively. In 1991 the consumption bundle of x and y was 4 x's and 5 y's. It is now 9 x's and 7 y's. Calculate the Laspeyres index of current prices relative to 1991 prices rounded to one decimal place. (Remember the Laspeyres index uses the old quantities for weights.)

Accepted Answer

A)  0.5 
B)  2.4 
C)  2.5 
D)  2.2 
E)  None of the above. 
A)  0.5 
B)  2.4 
C)  2.5 
D)  2.2 
E)  None of the above.

Question 12

Consider the case of Ronald. Let the prices and consumptions in the base year be as in situation D, where p1 = 3, p2 = 1, x1 = 5, and x2 = 15. If in the current year, the price of good 1 is $1 and the price of good 2 is $4, and Ronald's current consumptions of good 1 and good 2 are 25 and 5 respectively, what is the Laspeyres price index of current prices relative to base year prices? (Pick the most nearly correct answer.)

Accepted Answer

A)  1.50 
B)  2.17 
C)  1.25 
D)  1 
E)  3.25 
A)  1.50 
B)  2.17 
C)  1.25 
D)  1 
E)  3.25

Question 13

When prices are ($2, $4), Ms. Consumer chooses the bundle (7, 9), and when prices are ($15, $3), she chooses the bundle (10, 3). Is her behavior consistent with the weak axiom of revealed preference?

Accepted Answer

A)  Yes. 
B)  No. 
C)  We would have to observe a third choice to be able to say. 
D)  We can't tell because we are not told her income in the two cases. 
E)  None of the above. 
A)  Yes. 
B)  No. 
C)  We would have to observe a third choice to be able to say. 
D)  We can't tell because we are not told her income in the two cases. 
E)  None of the above.

Question 14

Howard Send is deciding whether to keep his car when he moves to New York City. To operate his car for a year, he would have to pay a flat fee of $6,000 for auto insurance and parking, plus $.20 for every mile that he drives for gasoline and repairs. Alternatively, he could give his car to his brother-in-law in Buffalo (the market value of the car is negligible) and take taxicabs in New York, which cost $1 a mile. Howard knows that if he took the car to New York he would drive 6,500 miles per year. If he places no value, positive or negative, on his brother-in-law's getting the car and if he is indifferent between riding a cab and driving, he should

Accepted Answer

A)  keep his car if he wouldn't want to travel as much as 6,500 miles by cab. 
B)  give his car away if he wouldn't travel more than 6,000 miles by cab but keep it if he would travel more than 6,000 miles by cab. 
C)  keep his car if he would travel more than 6,000 but less than 6,500 miles by cab. 
D)  give his car away. 
E)  There is not enough information given here to allow one to give him reasonable advice about what to do. 
A)  keep his car if he wouldn't want to travel as much as 6,500 miles by cab. 
B)  give his car away if he wouldn't travel more than 6,000 miles by cab but keep it if he would travel more than 6,000 miles by cab. 
C)  keep his car if he would travel more than 6,000 but less than 6,500 miles by cab. 
D)  give his car away. 
E)  There is not enough information given here to allow one to give him reasonable advice about what to do.

Question 15

When prices are ($6, $3), Holly chooses the bundle (9, 18), and when prices are ($1, $2), she chooses the bundle (8, 14).

Accepted Answer

A)  The bundle (9, 18) is revealed preferred to the bundle (8, 14) and she does not violate WARP. 
B)  She violates SARP but not WARP. 
C)  The bundle (8, 14) is revealed preferred to the bundle (9, 18) and she does not violate WARP. 
D)  She violates WARP. 
E)  None of the above. 
A)  The bundle (9, 18) is revealed preferred to the bundle (8, 14) and she does not violate WARP. 
B)  She violates SARP but not WARP. 
C)  The bundle (8, 14) is revealed preferred to the bundle (9, 18) and she does not violate WARP. 
D)  She violates WARP. 
E)  None of the above.

Question 16

A student spends all of her income on pizza and books. When pizzas cost $3 each and books cost $10 each, she consumed 30 pizzas and 3 books per month. The price of pizzas fell to $2.90 each while the price of books rose to $11 each. The price change

Accepted Answer

A)  made her worse off. 
B)  left her exactly as well off as before. 
C)  left her at least as well off as before and possibly helped her. 
D)  might have helped her, might have harmed her. We can't tell which unless we observe what she consumed after the price change. 
E)  had the same effect as a $3 increase in her income. 
A)  made her worse off. 
B)  left her exactly as well off as before. 
C)  left her at least as well off as before and possibly helped her. 
D)  might have helped her, might have harmed her. We can't tell which unless we observe what she consumed after the price change. 
E)  had the same effect as a $3 increase in her income.

Question 17

For a consumer who has an allowance to spend and no endowment of goods, a decrease in the price of an inferior good consumed makes him better off.

Accepted Answer

A) True 
 B)False

Question 18

Remember that the Laspeyres price index uses the old quantities for the weights. In 1991, good x cost $2 and good y cost $1. The current price of good x is $6 and the current price of good y is $2. In 1971 the consumption bundle was (x, y) = (3, 6). The current consumption bundle is (x, y) = (6, 4). The Laspeyres index of current prices relative to 1991 prices is closest to which of the following numbers?

Accepted Answer

A)  2.50 
B)  3.67 
C)  2.75 
D)  0.27 
E)  1.27 
A)  2.50 
B)  3.67 
C)  2.75 
D)  0.27 
E)  1.27

Question 19

When prices are ($2, $10), Emil chooses the bundle (1, 6), and when prices are ($12, $4), he chooses the bundle (7, 2).

Accepted Answer

A)  Emil violates WARP. 
B)  Emil has kinked indifference curves. 
C)  The bundle (1, 6) is revealed preferred to (7, 2), but (7, 2) is not revealed preferred to (1, 6). 
D)  The bundle (7, 2) is revealed preferred to (1, 6), but (1, 6) is not revealed preferred to (7, 2). 
E)  None of the above. 
A)  Emil violates WARP. 
B)  Emil has kinked indifference curves. 
C)  The bundle (1, 6) is revealed preferred to (7, 2), but (7, 2) is not revealed preferred to (1, 6). 
D)  The bundle (7, 2) is revealed preferred to (1, 6), but (1, 6) is not revealed preferred to (7, 2). 
E)  None of the above.

Question 20

Hillary has an initial endowment of $500 and is interested in two things: how many visits she can make to the doctor and how much money will be left over to spend on other things. When a trip to the doctor costs $60, Hillary sees the doctor 2 times. After health care reform, a visit to the doctor will cost $10 but her taxes will rise by $100.
a. Explain what conditions are necessary for Hillary to be made better off by health care reform.
b. Is it possible to tell whether Hillary has been made better off with the given information?
c. Explain what conditions are necessary for Hillary to be made worse off by health care reform.
d. Is it possible to tell whether Hillary has been made worse off with the given information?

Accepted Answer

a. Hillary must be able to afford a bund

Exam 6: Revealed Preference

When prices are ($4, $2), Tomoko chooses the bundle (9, 18), and when prices are ($1, $2), she chooses the bundle (8, 14).

At prices (p1, p2) = ($4, $1), George buys the bundle (x1, x2) = (10, 20). At prices = ($1, $4), he buys the bundle = (4, 14). At prices , he buys the bundle = (20, 10). If his preferences satisfy the strong axiom of revealed preferences, then it must be that

When the prices were ($5, $1), Vanessa chose the bundle (x, y) = (6, 3). Now at the new prices, (px, py), she chooses the bundle (x, y) = (5, 7). For Vanessa's behavior to be consistent with the weak axiom of revealed preference, it must be that

The Laspeyres price index differs from the Paasche price index because the Laspeyres index holds prices constant and varies quantities while the Paasche price index holds quantities constant and varies prices.

It follows from the weak axiom of revealed preference that if a consumer chooses x when he could afford y and chooses y when he could afford x, then his income must have changed between the two observations.

The strong axiom of revealed preference says that if a consumer bought x when he could have afforded y and bought y when he could have afforded z, then he will buy x whenever he can afford z.

If all prices increase by 20%,

When prices are ($2, $4), Ms. Consumer chooses the bundle (7, 9), and when prices are ($15, $3), she chooses the bundle (10, 3). Is her behavior consistent with the weak axiom of revealed preference?

When prices are ($6, $3), Holly chooses the bundle (9, 18), and when prices are ($1, $2), she chooses the bundle (8, 14).

A student spends all of her income on pizza and books. When pizzas cost $3 each and books cost $10 each, she consumed 30 pizzas and 3 books per month. The price of pizzas fell to $2.90 each while the price of books rose to $11 each. The price change

For a consumer who has an allowance to spend and no endowment of goods, a decrease in the price of an inferior good consumed makes him better off.

When prices are ($2, $10), Emil chooses the bundle (1, 6), and when prices are ($12, $4), he chooses the bundle (7, 2).

Budget Constraint

A: Budget Constraint

Preferences

A: Preferences

Utility

A: Utility

Choice

A: Choice

Demand

A: Demand

A: Revealed Preference

Slutsky Equation

A: Slutsky Equation

Buying and Selling

A: Buying and Selling

Intertemporal Choice

A: Intertemporal Choice

Asset Markets

A: Asset Markets

Uncertainty

A: Uncertainty

Risky Assets

A: Risky Assets

Consumers Surplus

A: Consumers Surplus

Market Demand

A: Market Demand

Equilibrium

A: Equilibrium

Auctions

A: Auctions

Technology

A: Technology

Profit Maximization

A: Profit Maximization

Cost Minimization

A: Cost Minimization

Cost Curves

A: Cost Curves

Firm Supply

A: Firm Supply

Industry Supply

A: Industry Supply

Monopoly

A: Monopoly

Monopoly Behavior

A: Monopoly Behavior

Factor Markets

A: Factor Markets

Oligopoly

A: Oligopoly

Game Theory

A: Game Theory

Game Applications

A: Game Applications

Behavioral Economics

Exchange

A: Exchange

Production

A: Production

Welfare

A: Welfare

Externalities

A: Externalities

Information Technology

A: Information Technology

Public Goods

At prices (p1, p2) = ($4, $1), George buys the bundle (x₁, x₂) = (10, 20). At prices = ($1, $4), he buys the bundle = (4, 14). At prices , he buys the bundle = (20, 10). If his preferences satisfy the strong axiom of revealed preferences, then it must be that

When the prices were ($5, $1), Vanessa chose the bundle (x, y) = (6, 3). Now at the new prices, (p_x, p_y), she chooses the bundle (x, y) = (5, 7). For Vanessa's behavior to be consistent with the weak axiom of revealed preference, it must be that