QUESTIONS for written exam in microeconomics. Only one answer is correct.

CONSUMPTION THEORY - first part (Varian, chapters 2-7)

1. Antonio buys only two goods, cigarettes and bananas. The cost of 1 packet of cigarettes is € 4 and the cost
of a pound of bananas is € 3. Spending his weekly income only in bananas, Antonio can buy 12 pounds of
bananas per week. How many packets of cigarettes (per week) could he buy, spending his income to buy
only cigarettes?
a) 36
b) 48
c) 9
d) 16
e) none of the other answers is correct.

2. Let px and py be the prices of goods x and y, and R be consumer's income. The intercept of the budget
line with the horizontal axis of the plane (x, y) represents:
a) the quantity of good x that the consumer can buy when R = 0
b) the quantity of good y that the consumer can buy when py = 0
c) the maximum amount of good x that the consumer can buy with income R
d) the maximum amount of good x that the consumer is willing to buy
e) none of the other answers is correct

3. Let px and py be the prices of goods x and y, and R consumer's income. The budget line shifts parallel
towards the origin if there is:
a) 5% increase of px and py
b) 5% increase of px and 10% increase of py
c) 5% increase of both prices and income
d) a change of consumer’s preferences
e) none of the other answers is correct

4. Assume oranges contain 120 calories per pound, and spinaches 40 calories per pound. If consumer’s
satisfaction increases with the number of calories, and depends only on this, identify which of the following
equations describes an indifference curve of the consumer.
A = pounds of oranges, S = pounds of spinaches, K = constant
(Hint: utility = calories)
a) 4A + 3S = 12
b) 4A + 3S = K
c) 3A + S = K
d) A + 3S = K
e) none of the other answers is correct.

5. Carlo has strictly convex preferences for goods 1 and 2. For him baskets (2, 10) and (10, 2) are indifferent.
Which of the following statements is necessarily true:
a) (5, 7) strictly preferred to (7, 5)
b) (7.5) strictly preferred to (5, 7)
c) (11: 1) strictly preferred to (2, 10)
d) (2, 10) strictly preferred to (11, 1)
e) none of the other answers is correct

6. Marco would like to offer maximum comfort to his two sons, tirelessly playing tennis matches one against
the other. He rents (hourly) for his sons the best tennis court of the city and the best racquets on the market.
If K is a constant, the indifference curves of Marco for hours-racket and hours-court are:
a) Min (2R, C) = K
b) Min (R, 2C) = K
c) Min (R, C) = K
d) 2R + C = K
e) none of the other answers is correct.
7. The intersection of two indifference curves is impossible due to:
a) the non satiation hypothesis
b) the decreasing marginal utility hypothesis
c) the transitivity of preferences
d) the monotonicity of preferences
e) none of the other answers is correct

8. Completeness of consumer preferences means that:

9. What should a consumer do with her endowment of goods x and y, if the marginal rate of substitution
(MRS) associated with that endowment is greater, in absolute value, than the relative price px / py?
a) reduce the consumption of y and increase that of x
b) reduce the consumption of x and increase that of y
c) do not modify the composition of her consumption basket
d) modify the price of good y
e) none of the other answers is correct

10. The marginal rate of substitution ( in absolute value) decreases as x increases (good x is measured on the
horizontal axis of the consumption plane)
a) because the slope of the budget line is decreasing
b) because preferences are concave
c) because preferences are reflexive
d) because preferences are monotonic
e) none of the other answers is correct

11. Consumer’s preferences are monotonic if:

12. The relation "is preferred to", defined on baskets of goods, is an example of a binary relation. The binary
relation "is more heavy than", defined on the set of human beings, is:
a) neither transitive nor complete, nor reflexive
b) reflexive, transitive and complete
c) reflexive and transitive, but not complete
d) transitive, but not complete, and not reflexive
e) transitive and complete, but not reflexive

13. In consumer theory, assuming strict convexity of preferences, what is the relation between optimal
choice X* and the tangency of the budget line with the indifference curve through X*?
a) tangency is always necessary and sufficient for optimal choice, no matter whether interior or corner
optima are involved.
b) tangency is necessary but not sufficient for optimal choice
c) tangency is sufficient but not necessary for optimal choice
d) tangency is sufficient but not necessary for optimal choice, only if corner optima are excluded
e) none of the other statements is correct

14. Gina's utility function is U (x, y) = y + 5x½. Gina consumes a unit of x and two units of y. If her
consumption of x becomes zero, how many units of y must she consume to be as well off as before?
a) 14
b) 9
c) 11
d) 7
e) none of the other answers is correct.

15. Paola's utility function is U (x, y) = x + 12y − 2y². Her income is 25. If the price of x is 1 and the price
of y is 8, how many units of x will Paola buy?
a) 15
b) 12
c) 17
d) 12,5
e) none of the other answers is correct.

16. Which of the following utility functions are monotonic increasing transformations of U(x, y) = xy?
(i) U(x, y) = 1000xy + 2000 ; (ii) U(x, y) = xy(1 − xy) ; (iii) U(x, y) = − 1/(10 + xy) ; (iv) U(x, y) = x/y ;
(v) U(x, y) = − xy.
a) none
b) i and ii
c) i, ii, iii
d) i, iii
e) none of the other answers is correct

17. A consumer utility function is min {3x, 2y}; the price of x is 5 and the price of y is 6. If he consumes 4
units of x, what is consumer’ income?
a) 56
b) 18
c) 70
d) 24
e) none of the other answers is correct

18. For consumer A the goods x and y are perfect complements in the proportion of 2 units of x and 3 units
of y (for instance, A always consumes 1 coffee with 1.5 teaspoons of sugar). At prices [5, 6] how many units
of x will she consume if her income is 56?
a) it's impossible to answer, because the utility function is not known
b) 2
c) 4
d) 5
e) none of the other answers is correct

19. Rocco's utility function represents regular preferences. He consumes only apples and bananas spending
an income m. There is an increase in the price of apples and simultaneously an increase in m so that, after the
change, Rocco's utility is unchanged. After the change Rocco consumes:
a) more bananas and fewer apples;
b) fewer bananas and more apples;
c) more of both goods;
d) less of both goods;
e) none of the other answers is correct.

20. If there are two goods, and consumer's income and the price of good 1 double, while the price of good 2
is unchanged, the consumer:
a) increases her demand for good 1 only if good 1 is a Giffen good
b) decreases the demand for good 2 only if good 2 is a Giffen good
c) increases the demand for good 2 only if good 2 is an inferior good
d) decreases the demand for good 2 only if good 2 is an inferior good
e) none of the other answers is correct.