Midterm Exam
Undergraduate Program in Economics
Course : Microeconomic Theory 2
Instructor : Prani Sastiono
Time : 180 Menit
Type : Closed book and closed note for AACSB Question.
Open Note (A4 1 piece both sides) for other questions.
There are three problem sets.
The first set is for AACSB assessment. Closed book and closed note (35 points).
Students are free to use cheating sheet for the second and third set of problems (65 points)
Answer AACSB problem set in separated sheet!
Cheating Sheet and New answer sheet would be distributed after student collected
their AACSB assessment.
Question 1: AACSB problem set (35 points)
Jennie likes to watch tv shows and she needs help to decide how she should allocate her money to buy
streaming passes. Jennie loves to watch Korean drama as much as American TV shows. Therefore, her
preference on streaming sites (𝑽𝒊𝒖, 𝑵𝒆𝒕𝒇𝒍𝒊𝒙) = (𝒙𝟏 , 𝒙𝟐 ) can be represented by this following utility
function:1
𝑼(𝒙𝟏 , 𝒙𝟐 ) = 𝒙𝟎.𝟓
𝟏 𝒙𝟐
𝟎.𝟓
Consumer has a given income/ wealth (𝐼) and faces 𝑝1 as price of Viu streaming pass and 𝑝2 as a price
of Netflix streaming pass.
a. Find Walrasian/Marshallian demand function of both goods! (7 points)
b. Find Indirect Utility Function! (5 points)
c. Using Duality Theorem, find the expenditure function! (5 points)
d. Using Shepard’s Lemma, find the Hicksian demand function of both goods! (6 points)
e. Initially, Viu stream pass price is 𝑝1 = $25 and Netflix stream pass price is 𝑝2 = $100 while
Jennie’s budget per semester for movie streaming is 𝐼 = $500. However, in order to get new
customers Netflix is giving discounts. Thus, Netflix price decreases from $100 to $64
(𝒑𝟎𝟐 = $𝟏𝟎𝟎 → 𝒑𝟏𝟐 = $𝟔𝟒). Find the substitution and income effect for Viu (𝒙𝟏 )! Use both
figure/graph and math/equation! (12 points)
Question 2: Provide short and clear explanation to answer these questions! (35 points)
a. Meghan and Harry are painting a room for their new baby boy. At the paint store, Harry says he
prefers Navy to Ordinary Blue, Light Blue, and Green Blue. Teddy also prefers Sky Blue to Navy,
and prefers Pool Blue to Navy. He also prefers Sky Blue to Pool Blue. The store is out of Sky
Blue, so they buy Pool Blue and paint their apartment with it. Harry then insists that they go
back, and buy Light Blue, and repaint the apartment. In your opinion, is Harry rational? (5
points)
b. What happen to Marshallian demand when prices and income changes proportionately at
the same rate? (5 points)
c. Lisa’s preference can be expressed using Leontief utility function 𝑈 = min(𝑎𝑥1 , 𝑏𝑥2 ) as graphed
below. Explain shortly what axioms are violated! (5 points)
d. If the good is normal, what is the sign of total effect of own price increase (substitution effect
+ income effect)? (5 points)
e. Do consumer choices at c and d violate WARP? (5 points)
f. The utility function of a consumer is 𝑈(𝑋1 , 𝑋2 ) = 𝑋1 + 𝑋2 and a consumer faces a budget
constraint p1 x1 + p2 x2 = w, where p1=1, p2=1, w=10, then calculate the Marshallian demand!
Is the solution unique? If p2 increases to 2 (from p2=2 to p2=1) recalculate the Marshallian
demand! Is it unique? (10 points)
Question 3: (30 points +10 bonus points) Duality and Slutsky Equation
Consumer’s expenditure function is the following:
̅) = 𝑈
𝑒(𝑝1 , 𝑝2 , 𝑈 ̅(𝑝10.5 + 𝑝20.5 )2
̅ is target utility. Following the duality between the Utility Maximization
where p is price of goods while 𝑈
Problem and the Expenditure Minimization Problem, answer the following question!
a. Find the Hicksian Demand Function (6)
b. Find the Indirect Utility Function! (6)
c. Show that Indirect Utility Function is strictly increasing in income (I)! (5 points)
d. Find the Walrasian/Marshallian Demand Function! (7)
e. Using Slutsky Equation, find the substitution and income effect of own price change in 𝑥1 ! (6 points)
f. Bonus points: Find the Original Utility Function! (10)
