NYU Shanghai – Eric Set

Microeconomics (ECON-SHU3)
Exam One – March 2, 2021

Name: ____________________________________ NetID:__________________________

Recitation instructor/room:___________________ Recitation time: __________________

This is Exam Form A

Exam instructions:

 Turn off your phone.

 Make sure you are seated in your assigned seat.
 Fill in your identification information at the top of the page.
 Separate the multiple choice response form and fill in your identification information.
 This is a closed-book exam. Notes, books, computers, etc., are not allowed.
 You may use a calculator (four-function, accounting, or graphing), but no programs.

The exam contains two parts. The first part is multiple choice and is worth 35% of the total
score. Your responses must be written on the multiple choice response sheet to be graded.
Please use your N-number for your ID, omitting the N. So N12345678 becomes 12345678.
See below for an example.

The second part of the exam is short answer and is worth 65% of the total score. Write your
answers in the space provided under each question. There will be little or no partial credit
for incorrect answers.

1 2 3 4 5 6 7 8

Example: How to complete your Akindi form

ECON-SHU3 S2021 Microeconomics Set
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Suppose your utility function for milk (M) and Bread(B) is u(M,B) = min{M, 4B}, i.e. if M < 4B, 1) _______
u(M,B) = M, otherwise u(M,B) = 4B. If you reduce your bread consumption by 1 unit, how
much do you have to increase your milk consumption in order to maintain the same utility
level?
A) 0 units B) 4 units C) It’s impossible D) It depends on
the current
consumption
level

2) Goods that are considered "bads" have this characteristic: 2) _______

A) for those goods, less is preferred to more.
B) preferences for those goods are not complete.
C) those goods have horizontal or vertical indifference curves.
D) their marginal rates of substitution are constant.

3) You are analyzing the demand for good X. Which of the following will result in a shift to the 3) _______
left of the demand curve for X?
A) An increase in the price of X
B) An increase in the price of a good that is a complement to good X
C) An increase in the price of a good that is a substitute for X
D) all of the above

The demand for books is: Qd = 120 - P

The supply of books is: Qs = 5P

4) If P = 30, which of the following is true? 4) _______

A) There is a shortage of greater than 30.
B) There is a surplus of greater than 30.
C) There is a shortage of less than or equal to 30.
D) There is a surplus of less than or equal to 30.

5) Bill currently uses his entire budget to purchase 5 cans of Pepsi and 3 hamburgers per week. 5) _______
The price of Pepsi is $1 per can, the price of a hamburger is $2, Bill's marginal utility from
Pepsi is 3, and his marginal utility from hamburgers is 6. Bill could increase his utility by:
A) increasing Pepsi consumption and reducing hamburger consumption.
B) increasing hamburger consumption and reducing Pepsi consumption.
C) maintaining his current consumption choices.
D) We do not have enough information to answer this question.
 Figure 1

6) Refer to Figure 1 above. The consumer chooses A on budget line I1 and C on budget line I2. 6) ______
Which of the following statements is true by revealed preference?
A) B is preferred to D. B) C is preferred to A.
C) A is preferred to C. D) D is preferred to B.

7) The price of lemonade is $2.00; the price of popcorn is $1.00. If Fred has maximized his 7) ______
utility by purchasing lemonade and popcorn, his marginal rate of substitution will be:
A) 2 lemonades for each popcorn.
B) 1 lemonade for each popcorn.
C) 1/2 lemonade for each popcorn.
D) indeterminate unless more information on Fred's marginal utilities is provided.
8) Which of the following could have caused the shift of the budget line above? 8) ______
A) A decrease in the price of food
B) A increase in the supply of food
C) A decrease in both prices
D) An increase in the utility for both goods

Figure 3

9) Refer to Figure 3 above. Which of the following statement is correct? 9) ______

A) Demand is of constant elasticity.
B) Demand elasticity in this case cannot be found by taking derivatives.
C) Demand is infinitely elastic.
D) Demand becomes more inelastic the higher the price.
10) Jay views bananas (X) and oranges (Y) as perfect substitutes in his consumption, and MRS = 10) ______
1/2 for all combinations of the two goods in his indifference map. Suppose the price of
bananas is $2 per pound, the price of oranges is $3 per pound, and Jay's budget is $30 per
week. What is Jay's utility maximizing choice between these two goods?
A) 15 pounds of bananas and no oranges
B) 5 pounds of bananas and 5 pounds of oranges
C) 4 pounds of bananas and 6 pounds of oranges
D) 10 pounds of oranges and no bananas
E) none of the above

11) Oscar consumes only two goods, X and Y, which are not complements. Assume that Oscar is 11) ______
not at a corner solution, but he is maximizing utility. Which of the following is NOT
necessarily true?
A) MRS = Px/Py.
B) MUx/Px = MUy/Py.
C) PxX = PyY.
D) MUx/MUy = Px/Py.
E) PxX + PyY = I.

Table 1
Food Clothing
A 6 3
B 8 5
C 5 8

12) Refer to Table 1. If preferences satisfy all four of the basic assumptions: 12) ______
A) B is preferred to C.
B) B is on the same indifference curve as C.
C) B is preferred to A.
D) A is preferred to C.
E) None of the above are necessarily true.
 Figure 4

13) Refer to Figure 4 above. Along this budget line, the price of food is: 13) ______
A) One clothing B) Two clothing C) Cannot tell D) None of the
above

14) We observe that both the price of and quantity sold of golf balls are rising over time. This is 14) ______
due to:
A) increases in the price of golf clubs over time.
B) decreases in membership fees for country clubs with golf facilities.
C) continual improvements in the technology used to produce golf balls.
D) more stringent professional requirements on the quality of golf balls requiring
producers to use more expensive raw materials.
SHORT ANSWERS are worth 65% of the total exam grade. When possible, answers should be in decimals
(rounded to four places), not fractions.

1. (7 points) A researcher is trying to find out a student’s preference for good versus , and finds out that
her utility function could be written as , where . The student’s disposable
money is $200.

a. (2 points) The prices of the goods are . Find the optimal bundle if .

b. (2 points) When the prices become , the optimal bundle becomes . Estimate .
d. (1 point) The researcher’s assistant has applied a new technique and estimated B = 15. How should the
researcher respond?

This researcher has another student, whose utility function is . This

student’s disposable money is only $100. The prices of the goods are for items e and f.

e. (2 points) What is this student’s optimal bundle?

2. (10 points) Suppose the equilibrium price for cherries in January is . Some economists estimate the
following demand function for cherries:

a. (2 points) Calculate the price elasticity of the demand for cherries at .

b. (2 points) If Prices increase by 1%, what is the percentage decrease in the quantity demanded? (Hint: an
approximation is enough)
In late January, some samples of imported cherries were found to be Covid-19 positive and assume this
incident has decreased the demand for cherries by 60%.

c. (1 point) Calculate the new demand function.

Suppose the quantity supplied for cherries is 20 and does not change with the price.

d. (1 point) Calculate the new equilibrium price.

e. (1 points) Suppose the government wants to protect cherry farmers and forbids the price from falling
below $6 per pound. At $6, will there be a cherry shortage or cherry surplus? How large?
f. (3 points) Graph the market for cherries using the information from items c through e. Pay attention to
the shape of the curves. Indicate the price and quantities both before and after the government
protection. Indicate the shortage/supply post-protection, too.
3. (4 points) The price of electricity in the Kanto region is determined in a competitive market. The weather
is expected to be unusually hot over the next few days.

• Typically, higher temperatures coincide with increased air conditioner use.

• Field engineers are reporting that power production will likely be noticeably less efficient during
the hot weather because it will be more difficult to keep the power plants cool.
• The neighboring region, Johto, will not be affected by the unusually hot weather.
• Johto and Kanto’s energy grids are connected, so Johto energy producers can produce energy that is
used in Kanto (and vice versa). (Unnecessary detail: the electricity is purchased from Johto
producers by Kanto energy producers that supply it to Kanto consumers).

a. Describe, using appropriate graphs, how the Johto and Kanto electricity markets are affected by the
extreme weather in Kanto. State the predicted impact on the equilibrium price and quantity in Johto
and Kanto. There are multiple acceptable approaches, so provide an explanation of your graphs.

Johto Kanto
4. (2 points) Eric’s preferences over bundles A – E are complete and transitive. Given:

• Eric has strict preferences between bundles A, B, C, D, and E.

• Given a choice between A, B, and C, Eric prefers A.
• Given a choice between C, D, and E, Eric prefers C.
• Given a choice between B, C, and E, Eric prefers C.
• Given a choice between B, D and E, Eric prefers D.

a. Let U(C) = 0. Construct a utility function that satisfies (does not contradict) the information above.
(Hint: it should be very simple).
5. (3 points) In many cities, more people are deciding to have fewer children than in the past. Although
some might point to changing attitudes towards having children, another possible reason might be the
rising costs associated with raising children. Sketch this idea using indifference curves. It should be clear in
your diagram that the new behavior (fewer children) is not due to a change in preferences. Name your axes
carefully and explain briefly.

END OF EXAM
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