You are on page 1of 18

Section I: True or False This section is worth a total of 10 marks.

There are 10 questions worth 1 mark each; answer all of them. Simply indicate if you think the statement is true or false. 1. A consumer with convex preferences who is indierent between the bundles (5, 1) and (11, 3) will like the bundle (8, 2) at least as well as either of the rst two bundles. True False

2. Wanda Lott has the utility function U (x, y ) = max{x, y }. Wandas preferences are convex. True False

3. Other things being equal, a lump sum tax is at least as good for a consumer as a sales tax that collects the same revenue from him. True False

4. Isaiah is a net borrower when the interest rate is 5% and a net saver when the interest rate is 25%. An increase in the interest rate from 5 to 25% may make Isaiah worse o. True False

5. If a price changes, then changes in consumption at the intensive margin are changes that happen because consumers alter the amounts that they consume but do not either stop consuming or start consuming the good. True False

6. The demand curve, which is a downward-sloping straight line, crosses the supply curve, which is an upward-sloping straight line. If a tax is introduced where sellers must pay a tax of \$2 per unit sold, then the equilibrium price paid by demanders will rise by more than \$1 if the absolute value of the slope of the demand curve is greater than the absolute value of the slope of the supply curve. True False

7. If the production function is f (x, y ) = x + min{x, y }, then there are constant returns to scale. True False

8. Just as in the theory of utility-maximizing consumers, the theory of prot-maximizing rms allows the possibility of Gien factors. These are factors for which a fall in price leads to a fall in demand. True False

9. If the production function is f (x1 , x2 ) = min{x1 , x2 }, then the cost function is c(w1 , w2 , y ) = min{w1 , w2 }y True False

10. A competitive rm has a continuous marginal cost curve. It nds that as output increases, its marginal cost curve rst rises, then falls, then rises again. If it wants to maximize prots, the rm should never produce at a positive output where price equals marginal cost and marginal cost decreases as output increases. True False

Section II: Multiple Choice This section is worth a total of 60 marks. There are 30 questions worth 2 marks each; answer all of them. Select the best answer from those available. 1. Angela consumes goods x and y . Her indierence curves are described by the formula y = k/(x + 3). Higher values of k correspond to better indierence curves. Which of the following statements is true? (a) Angela prefers bundle (8, 9) to bundle (9, 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A (b) Angela likes good y and hates good x (c) Angela prefers bundle (11, 9) to bundle (9, 11) (d) Angela likes good x and hates good y (e) More than one of the above statements are true 2. Toby Talkalot subscribes to a local phone service that charges a xed fee of \$10 per month and allows him to place as many local phone calls as he likes without further charge. Let good 1 be an aggregate of commodities other than local phone use and let good 2 be local phone use. (Measure good 1 on the horizontal axis and good 2 on the vertical axis.) On Monday, Toby didnt use the telephone at all. The slope m of his indierence curve at the consumption bundle he chose on Monday was (a) positive (b) less than or equal to 0 (c) 0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C (d) greater than or equal to 0 (e) negative 3. Doreen has preferences represented by the utility function U (x, y ) = 10x + 5y . She consumes 10 units of good x and 9 units of good y . If her consumption of good x is lowered to 1, how many units of y must she have in order to be exactly as well o as before? (a) 30 (b) 30 (c) 27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C (d) 18 (e) None of the above

4. Seppo consumes brandy and saunas. Neither is an inferior good. Seppo has a total of \$30 a day and 6 hours a day to spend on brandy and saunas. Each brandy costs \$2 and takes half an hour to consume. Each sauna costs \$1 and takes 1 hour to consume. (It is, unfortunately, impossible to consume a brandy in the sauna.) Seppo suddenly inherits a lot of money and now has \$50 a day to spend on brandy and saunas. Since Seppo is a rational consumer, he will (a) increase brandy consumption only (b) increase sauna consumption only (c) increase consumption of both (d) consume the same amounts of both goods as before . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D (e) We cant tell since we are told nothing about his preferences 5. Walt considers x and y to be perfect substitutes. They originally cost \$10 and \$9 respectively. His income is \$720. One day the price of x drops to \$8. (a) The income eect increases the quantity of y to 90 (b) The substitution eect increases the quantity of y to 80 (c) The substitution eect increases the quantity of x to 90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C (d) The income eect increases the quantity of x to 80 (e) None of the above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E 6. Nevilles demand function for claret is q = 0.02m 2p, where m is income and p is price. Neville has a friend named Cedric who has the same demand function for claret as Neville. Cedrics income is \$6,000 and he initially had to pay a price of \$40 per bottle of claret. The price of claret rose to \$60. The substitution eect of the price change (a) reduced his demand by 40 (b) reduced his demand by 56 (c) reduced his demand by 24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C (d) increased his demand by 40 (e) reduced his demand by 34 7. Peter consumes no commodities other than Miller Lite and Bud Light. His annual budget for these two commodities is described by the equation 5x + 30y = 300, where x is sixpacks of Miller Lite and y is cases of Bud Light. Peter considers 2 cases of Bud Light to be perfect substitutes for 6 sixpacks of Miller Lite. (a) He will consume 60 sixpacks of Miller Lite per year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A (b) He will consume 10 cases of Bud Light per year (c) He will consume 14 cases of Bud Light per year (d) He will consume 12 sixpacks of Miller Lite per year (e) He is indierent between any two bundles that use up his entire income 4

8. Mary Granola consumes tomatoes and nectarines. Marys indierence curves are kinky. When she is consuming more tomatoes than nectarines, she is just willing to trade 3 tomatoes for 1 nectarine. When she is consuming more nectarines than tomatoes, she is just willing to trade 4 nectarines for 1 tomato. Let P1 be the price of nectarines, and P2 the price of tomatoes. Mary maximizes her utility subject to her budget constraint. (Hint: Sketch one of her indierence curves.) (a) When P1 > P2 , she must consume only tomatoes (b) When P1 > P2 , she must consume 3 times as many tomatoes as nectarines (c) When P1 > 3P2 , she must consume only tomatoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C (d) When 4P1 > P2 , she must consume only nectarines (e) She must consume equal numbers of both 9. Janet consumes x1 and x2 together in xed proportions. She always consumes 2 units of x1 for every unit x2 . One utility function that describes her preferences is (a) U (x1 , x2 ) = 2x1 x2 (b) U (x1 , x2 ) = 2x1 + x2 (c) U (x1 , x2 ) = x1 + 2x2 (d) U (x1 , x2 ) = min{2x1 , x2 } (e) U (x1 , x2 ) = min{x1 , 2x2 } . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E 10. Georgina consumes only grapefruits and pineapples. Her utility function is U (x, y ) = x2 y 8 , where x is the number of grapefruits consumed and y is the number of pineapples consumed. Georginas income is \$105, and the prices of grapefruits and pineapples are \$1 and \$3, respectively. How many grapefruits will she consume? (a) 10.5 (b) 7 (c) 63 (d) 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D (e) None of the above

11. Twenty years ago, Dmitri consumed bread which cost him 10 kopeks a loaf and potatoes which cost him 20 kopeks a sack. With his income of 330 kopeks, he bought 9 loaves of bread and 12 sacks of potatoes. Today he has an income of 452 kopeks. Bread now costs him 22 kopeks a loaf and potatoes cost him 17 kopeks a sack. Assuming his preferences havent changed (and the sizes of loaves and sacks havent changed), when was he better o? (a) He was better o 20 years ago (b) He is better o today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B (c) He was equally well o in the two periods (d) From the information given here, we are unable to tell (e) None of the above 12. Sams utility function is U (x, y ) = 2x + y , where x is the number of xs he consumes per week and y is the number of y s he consumes per week. Sam has \$200 a week to spend. The price of x is \$4. Sam currently doesnt consume any y . Sam has received an invitation to join a club devoted to the consumption of y . If he joins the club, Sam can get a discount on the purchase of y . If he belonged to the club, he could buy y for \$1 a unit. How much is the most Sam would be willing to pay to join this club? (a) Nothing (b) \$100 a week . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B (c) \$50 a week (d) \$40 a week (e) None of the above 13. Sir Plus has a demand function for mead that is given by the equation D(p) = 100 p. If the price of mead is \$60, how much is Sir Pluss net consumers surplus? (a) \$40 (b) \$1,600 (c) \$400 (d) \$3,900 (e) \$800 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E 14. If the demand function for tickets to a play is q = 3, 800 95p, at what price will total revenue be maximized? (a) \$80 (b) \$40 (c) \$20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C (d) \$10 (e) none of the above 6

15. Rollo would love to have a Mercedes. His preferences for consumption in the next year are represented by a utility function U (x, y ), where x = 0 if he has no Mercedes and x = 1 if he has a Mercedes for the year and where y is the amount of income he has left to spend on other stu. If U (0, y ) = y 0.5 and U (1, y ) = (10/9)y 0.5 and if Rollos income is \$50,000 a year, how much would he be willing to pay per year to have a Mercedes? (a) \$5,555.55 (b) \$5,000 (c) \$12,200 (d) \$9,500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D (e) \$10,000 16. The inverse demand function for mangos is dened by the equation p = 91 5q , where q is the number of crates that are sold. The inverse supply function is dened by p = 3 + 6q . In the past there was no tax on mangos but now a tax of \$44 per crate has been imposed. What are the quantities produced before and after the tax was imposed? (a) 5 crates before and 5 crates after (b) 16 crates before and 9 crates after (c) 14 crates before and 7 crates after (d) 8 crates before and 4 crates after . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D (e) None of the above 17. Xaquane and Yullare are obscure but talented eighteenth-century painters. The worlds stock of Xaquanes is 100 and the worlds stock of Yullares is 70. The demand for each painters work depends on its own price and the price of the other painters work. If Px is the price of Xaquanes and Py is the price of Yullares, the demand function for Xaquanes is 101 3Px + 2Py and the demand function for Yullares is 72+ Px Py . What is the equilibrium price for Yullares paintings? (a) \$5 (b) \$11 (c) \$12 (d) \$7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D (e) None of the above

18. A rm has the production function f (x, y ) = x0.5 + y , where x is the amount of factor x it uses and y is the amount of factor y . On a diagram we put x on the horizontal axis and y on the vertical axis. We draw some isoquants. Now we draw a straight line on the graph and we notice that the slopes of all the isoquants that it meets have the same slope at the point where they meet this line. The straight line we drew was (a) vertical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A (b) horizontal (c) diagonal through the origin with slope 0.5 (d) diagonal with slope 2 (e) diagonal with slope greater than 2
a b 19. Suppose that the production function is f (x1 , x2 ) = (xa 1 + x2 ) , where a and b are positive constants. For what values of a and b is there a diminishing technical rate of substitution?

(a) For any value of a if b < 1 (b) For any values of a and b if ab < 1 (c) For any values of a and b if a > b (d) For any value of b if a < 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D (e) None of the above 20. A rm has the production function f (x, y ) = x0.9 y 0.8 . This rm has (a) constant returns to scale (b) decreasing returns to scale and dimininishing marginal products for factor x (c) decreasing returns to scale and increasing marginal product for factor x (d) increasing returns to scale and decreasing marginal product of factor x . . . . . . . . . . . . . . D (e) None of the above 21. The production function is given by f (x) = 4x1/2 . If the price of the commodity produced is \$60 per unit and the cost of the input is \$10 per unit, how much prots will the rm make if it maximizes prots? (a) \$1,440 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A (b) \$718 (c) \$2,884 (d) \$1,425 (e) \$723

22. When Farmer Hoglund applies N pounds of fertilizer per acre, the marginal product of fertilizer is 1 N/200 bushels of corn. If the price of corn is \$4 per bushel and the price of fertilizer is \$1.20 per pound, then how many pounds of fertilizer per acre should Farmer Hoglund use in order to maximize his prots? (a) 280 (b) 74 (c) 140 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C (d) 288 (e) 200 23. A competitive rm uses two inputs, x and y . Total output is the square root of x times the square root of y . The price of x is \$17 and the price of y is \$11. The company minimizes its costs per unit of output and spends \$517 on x. How much does it spend on y ? (a) \$766 (b) \$480 (c) \$655 (d) \$517. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D (e) None of the above 24. Using existing plant and equipment, Priceless Moments Figurines can be manufactured using plastic, clay, or any combination of these materials. A gurine can be manufactured by F = 4P + 2C , where P is pounds of plastic and C is pounds of clay. Plastic costs \$2 per pound and clay costs \$5 per pound. What would be the lowest cost of producing 40,000 gurines? (a) \$20,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A (b) \$100,000 (c) \$60,000 (d) \$10,000 (e) \$40,000

25. The VCR manufacturing business is perfectly competitive. Suppose that currently, rms that manufacture VCRs utilize either technology 1 with total cost function C1 (Q) = 1120 60Q + Q2 or technology 2 with total cost function C2 (Q) = 300 20Q + Q2 . In the long run, assuming no new manufacturing technologies, what will happen in this industry? (a) Firms utilizing technology 1 and rms utilizing technology 2 will stay in business (b) Firms utilizing technology 1 will shut down, but rms utilizing technology 2 will stay in business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B (c) Firms utilizing technology 1 will stay in business, but rms utilizing technology 2 will shut down (d) Firms utilizing technology 1 and rms utilizing technology 2 will shut down (e) None of the above 26. A prot-maximizing rm continues to operate even though it is losing money. It sells its product at a price of \$100. (a) Average total cost is less than \$100 (b) Average xed cost is less than \$100 (c) Marginal cost is increasing (d) Average variable cost is less than \$100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D (e) Marginal cost is decreasing 27. Suppose that Dent Carrs long-run total cost of repairing s cars per week is c(s) = 3s2 + 108. If the price he receives for repairing a car is \$18, then in the long run, how many cars will he x per week if he maximizes prots? (a) 4.50 (b) 0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B (c) 6 (d) 3 (e) 9 28. The bicycle industry is made up of 100 rms with the long-run cost curve c(y ) = 2 + (y 2 /2) and 60 rms with the long-run cost curve c(y ) = y 2 /10. No new rms can enter the industry. What is the long-run industry supply curve at prices greater than \$2? (a) y = 400p . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A (b) y = 420p (c) y = 200p (d) y = 300p (e) y = 435p

10

29. The demand for a monopolists output is 6, 000/(p + 2)2 , where p is the price it charges. At a price of \$3, the elasticity of demand for the monopolists output is (a) 1 (b) 2.20 (c) 1.20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . C (d) 1.70 (e) 0.70 30. A monopoly has the demand curve q = 10, 000 100p. Its total cost function is c(q ) = 1, 000 + 10q . The government plans to tax the monopolys prots at a rate of 50%. If it does so, the monopoly will (a) increase its price by 50% (b) increase its price by more than 50% (c) recover some but not all of the tax it pays by increasing its price (d) not change its price or the quantity it sells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D (e) None of the above

11

Section III: Short Answer This section is worth 30 marks and contains 6 questions; answer all of them. Explain your answers and use appropriately labelled diagrams if necessary. 1. (5 marks) Jim takes two accounting exams. His overall grade for the course will be the maximum of his scores on the two exams. Jim decides to spend a total of 200 minutes studying for these two examinations. If he spends m1 minutes studying for the rst examination, his score on this exam will be x1 = m1 /5. If he spends m2 minutes studying for the second examination, his score on this exam will be x2 = m2 /10. (a) On the graph below, draw a budget line showing the various combinations of scores on the two exams that Jim can achieve with a total of 400 minutes of studying. On the same graph, draw two or three indierence curves for Jim. On your graph, nd the point on Jims budget line that gives her the best overall score in the course. score on exam 2

100 80 60 40 20 0 optimal point 20 40 60 80 100

score on exam 1

(b) Given that he spends a total of 200 minutes studying, Jim will maximize his overall score by achieving a score of g1 on the rst exam and g2 on the second exam. What are g1 and g2 ? From the above gure, we see that if Jim has 400 (or 200) minutes to study, it is optimal to use all that time to study for rst exam; therefore g1 = 80 and g2 = 0 (or g1 = 40 and g2 = 0)

12

2. (5 marks) The cost function c(w1 , w2 , y ) of a rm gives the cost of producing y units of output when the wage of factor 1 is w1 and the wage of factor 2 is w2 . Find the cost functions for the following rms: (a) A rm with production function f (x1 , x2 ) = min{2x1 , 3x2 } This is xed proportions production technology. It is optimal to use 2 units of x1 with every 3 units of x2 . So the cost function is c=y w2 w1 + 2 3

(b) A rm with production function f (x1 , x2 ) = 2x1 + 3x2 This is perfect substitutes production technology. It is optimal to use just a single input, whichever is cheapest. So the cost function is c = y min w1 w2 , 2 3

(c) A rm with production function f (x1 , x2 ) = max{2x1 , 3x2 } As in the previous case, it is optimal to use just a single input, whichever is cheapest. So the cost function is w1 w2 c = y min , 2 3

13

3. (5 marks) Anns rm makes sweaters. Her production function is f (x1 , x2 ) = x1 + 4x2 , where x1 is the amount of unskilled labor and x2 is the amount of capital that she employs. (a) In the graph below, draw a production isoquant representing input combinations that will produce 40 units of output. Draw another isoquant representing input combinations that will produce 60 units of output.

x2
60 50 40 30 20 10

10

20

30

40

50

60

x1
(b) Does this production function exhibit increasing, decreasing, or constant returns to scale? Constant returns to scale; doubling the amounts of all inputs, doubles the amount of output (c) If Ann uses only capital to produce sweaters, how much capital would she need in order to produce y sweaters? To produce y units of output, she needs to use y/4 units of capital. (d) If Ann faces factor prices (w1 , w2 ), what will be the minimal cost of producing y units of output? This is perfect substitutes production technology. It is optimal to use just a single input, whichever is cheapest. So the cost function is c = y min w1 , w2 4

14

1.40 0.60 0.20 0.25 4. (5 marks) The demand for Craftmatic Adjustable Beds is described by Qc = Pc I Pm A , where Qc is the number of Craftmatic Adjustable Beds demanded, Pc is the price of a Craftmatic Adjustable Bed, I is per capita income, Pm is the price of a battery-powered massage pillow, and A is the advertising budget.

(a) If the marginal cost of producing a Craftmatic Adjustable Bed is \$200, what is the protmaximizing price? The prot-maximizing price is found where M R = M C . Since Craftmatic is setting the price, we assume they are a monopolist. In which case MR = p 1 + 1

Price elasticity of demand, , is

dQc PC 1.40 0.60 0.20 0.25 . Since Qc = Pc I Pm A , then dPc QC = 1.40 Qc PC = 1.40 Pc QC

dQc = 1.40Qc /Pc dPc So if M C = 200, them MR = p 1 So the prot maximizing price is \$700.

1 = 200 1.4

Pc = 700

(b) Per capita income in the United States is forecast to rise by 3% next year. How will this impact Craftmatics sales? We have dQc I I = dI QC so Qc I dQc = 0.60Qc /I I = 0.60 = 0.60 dI I QC Finally, a 3% increase in income will result in a 3% 0.6 = 1.8% change in Qc (ie, a 1.8% decrease in sales). (c) The price of battery-powered massage pillows suddenly fell by 10%. How will this impace Craftmatics sales? We have dQc Pm Pm = dPm QC so dQc Qc Pm = 0.20Qc /Pm Pm = 0.20 = 0.20 dPm Pm QC Finally, a 10% decrease in the price of battery-powered massage pillows will result in a 10% 0.2 = 2.0% change in Qc (ie, a 2.0% decrease in sales).

15

5. (5 marks) In the city of Nottoobright, the mayor has decided that the rents are too high. The long-run supply function of one-room rental apartments is given by q = 600 + 2p and the long-run demand function is given by q = 3000 2p, where p is the rental rate in dollars per week. The authorities made it illegal to rent an apartment for more than 50 dollars per week. To avoid a housing shortage, the authorities agreed to pay landlords enough of a subsidy to make supply equal to demand. How much would the weekly subsidy per apartment have to be to eliminate excess demand at the ceiling price? Explain. The equilibrium price that would prevail if there were no price ceiling would be \$600, which is found by solving qd = qs 3000 2p = 600 + 2p So the price ceiling of \$50 is binding. When the price is \$50, the quantity demand is 3000 2 50 = 2900. So we need to know what subsidy will result in a quantity supplied of 2900 when the price is \$50. Denoting the required subsidy by s, we need to solve 2900 = 600 + 2(50 + s) for s. Doing so, we nd that the required subsidy is \$1100.

16

6. (5 marks) Belinda loves chocolate and always thinks that more is better than less. Belinda thinks that a few piano lessons would be worse than none at all, but if she had enough piano lessons to get good at playing the piano, she would prefer more lessons to less. Draw a graph with piano lessons on the horizontal axis and chocolate on the vertical axis. On your graph sketch two indierence curves for Belinda that would be consistent with this story. Label the better of the two indierence curves AA and the worse one BB . chocolate

AA

BB piano lessons

The indierence curves would look something like inverted Us. (The area under these curves neednt be necessarily convex.) The better of the two curves drawn is the higher one.

17

18

Reference Sheet

f (x1 , x2 ) 2x1 + 3x2 4x1 + 6x2 ax1 + bx2

.5 x0 1 + x2

df (x1 , x2 ) dx1 2 4 a
0.5 0.5x1 1 x1

df (x1 , x2 ) dx1 3 6 b 1 1 1 x1
b1 bxa 1 x2

ln x1 + x2 v (x1 ) + x2 x1 x2
b xa 1 x2

v (x1 ) x2
1 b axa x2 1

(x1 + 2)(x2 + 1) (x1 + a)(x2 + b) xa 1 + xa 2

x2 + 1 x2 + b
1 axa 1 1 axa 1 1 b c1 axa c(xa 1 + x2 ) 1

x1 + 2 x1 + a
1 axa 2 1 axa 2 b1 b c1 bx2 c(xa 1 + x2 )

a xa 1 + x2 b c (xa 1 + x2 )

MRS =

TRS =

19