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Sample
Test
Chapter_05___Different_Types_of_Tastes
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1. Homothetic tastes
are always tastes over essential goods.
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ANSWER:
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False
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RATIONALE:
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Tastes for perfect substitutes are homothetic — but
neither good is essential in that case.
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POINTS:
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1
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DIFFICULTY:
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A-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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2. Tastes for perfect
substitutes are both homothetic and quasilinear.
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ANSWER:
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True
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RATIONALE:
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The MRS for
such tastes is the same everywhere — which implies it is the same along any
ray from the origin (required for homotheticity) and along any vertical or
horizontal ray (implying quasilinearity in both goods).
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POINTS:
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1
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DIFFICULTY:
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A-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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3. Tastes for perfect
complements are both homothetic and quasilinear.
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ANSWER:
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False
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RATIONALE:
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They are not quasilinear.
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POINTS:
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1
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DIFFICULTY:
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A-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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4. There are no quasilinear
tastes that have elasticity of substitution equal to 1 everywhere.
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ANSWER:
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True
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RATIONALE:
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In order for tastes to have constant elasticity of
substitution, they must be representable by a constant elasticity of
substitution (CES) utility function. The CES utility function that has
elasticity of substitution equal to 1 is the Cobb-Douglas function — which
is homothetic and not quasilinear.
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POINTS:
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1
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DIFFICULTY:
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B-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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5. There are no
quasilinear tastes that have constant elasticity of substitution.
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ANSWER:
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False
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RATIONALE:
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This is false — perfect substitutes are quasilinear
(in both goods) and have constant elasticity of substitution equal to .
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POINTS:
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1
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DIFFICULTY:
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B-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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6. There is no
elasticity of substitution that is inconsistent with tastes being homothetic.
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ANSWER:
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True
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RATIONALE:
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All CES utility functions represent homothetic
tastes — and their elasticity of substitution can vary from 0 to .
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POINTS:
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1
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DIFFICULTY:
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B-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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7. Consider the
utility function . If , the elasticity of substitution is equal to 1.
The elasticity of substitution for CES utility functions is .
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ANSWER:
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True
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RATIONALE:
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The elasticity of substitution for CES utility
functions is .
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POINTS:
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1
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DIFFICULTY:
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B-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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8. Consider the
utility function . If , the elasticity of substitution is equal to .
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ANSWER:
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False
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RATIONALE:
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The elasticity of substitution for CES utility
functions is — thus the elasticity of substitution in this case is .
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POINTS:
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1
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DIFFICULTY:
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B-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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9. All homogeneous
functions (of any degree) are homothetic but not all homothetic functions are
homogeneous (of some degree).
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ANSWER:
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False
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RATIONALE:
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All homothetic functions are homogeneous but not
all homogeneous functions are homothetic.
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POINTS:
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1
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DIFFICULTY:
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B-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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10. If tastes are
Cobb-Douglas, they can be represented by a utility function that is
homogeneous of degree k where k can take on any
positive value.
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ANSWER:
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True
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RATIONALE:
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The Cobb-Douglas utility function is homogeneous of
degree . Since we can take a utility function to any power an retain the
same underlying indifference curves, we can represent Cobb-Douglas
indifference curves with a function that is homogeneous of any degree.
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POINTS:
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1
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DIFFICULTY:
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B-Section Material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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11. When two goods are
perfect substitutes, averages are better than extremes, resulting a diminishing
marginal rate of substitution.
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ANSWER:
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False
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RATIONALE:
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When two goods are perfect substitutes, averages
are valued the same as extremes, resulting in a constant indifference
curve, giving us constant rather than diminishing marginal rates of
substitution.
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POINTS:
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1
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DIFFICULTY:
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A section material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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10/7/2015 1:00 PM
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DATE MODIFIED:
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10/7/2015 2:04 PM
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12. In the case of perfect
complements, more is not necessarily better.
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ANSWER:
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True
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RATIONALE:
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Perfect complements represent an extreme case in
that more of one component is not better if the other is missing; only more
of both goods is better.
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POINTS:
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1
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DIFFICULTY:
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A section material
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QUESTION TYPE:
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True / False
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HAS VARIABLES:
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False
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DATE CREATED:
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10/7/2015 1:00 PM
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DATE MODIFIED:
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10/7/2015 2:08 PM
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13. Suppose consumer
cannot taste the difference between Miller Lite and Bud Light, but Miller
Lite is sold in 12 ounce cans while Bud Light is sold in 8 ounce cans. In a
graph with cans of Miller Lite on the horizontal and cans of Bud Light on the
vertical axis, which of the following is the correct slope for this
consumer’s indifference curves:
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a.
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b.
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-1
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c.
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d.
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There is not enough information to tell.
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ANSWER:
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c
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RATIONALE:
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It takes 1.5 Bud Light cans to get to 12 ounces of
beer — which is what one can of Miller Lite contains. Thus, 1.5 cans of Bud
Light are just as good as (and no better than) 1 can of Miller Lite, giving
us the slope of -1.5.
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POINTS:
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1
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DIFFICULTY:
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A-Section Material
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QUESTION TYPE:
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Multiple Choice
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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14. Consider the
utility function . Which of the following are true statements about the
indifference maps represented by this function.
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a.
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MRS=-1
along the 45 degree line if and only if .
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b.
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MRS=-1
along a ray steeper than the 45 degree line if and only if .
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c.
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MRS=-1
along a ray shallower than the 45 degree line if and only if .
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d.
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All of the above.
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e.
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None of the above.
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ANSWER:
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a
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RATIONALE:
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When the exponents are equal to one another, the
Cobb-Douglas function gives rise to indifference curves that are symmetric
around the 45 degree line — thus (a) is true. Options (b) and (c) would be
true if the inequalities were reversed.
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POINTS:
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1
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DIFFICULTY:
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B-Section Material
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QUESTION TYPE:
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Multiple Choice
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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15. Suppose our tastes
are homothetic. It is often observed that people become more rigid — more set
in their ways — as they get older. Can you translate this observation into
“economics-speak” by discussing which feature of our tastes is likely the be
changing as we get older?
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ANSWER:
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The feature of our tastes that is indicative of
“flexibility” is the degree of substitutability in our indifference map.
The more substitutable we think of goods, the more flexible we are in
terms, whereas we become more inflexible as our tastes treat goods as
relatively more complementary.
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POINTS:
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1
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DIFFICULTY:
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A-Section Material
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QUESTION TYPE:
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Subjective Short Answer
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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16. Suppose our tastes
can be represented by the function . It is often observed that people become
more rigid — more set in their ways — as they get older. What parameter is
changing as we get older — and how is it changing? (Explain.)
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ANSWER:
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The parameter is increasing from a value as low as
-1 to a value as high as — causing our elasticity of substitution to fall
from a value as high as to one as low as 0 as we grow older.
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POINTS:
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1
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DIFFICULTY:
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B-Section Material
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QUESTION TYPE:
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Subjective Short Answer
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HAS VARIABLES:
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False
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DATE CREATED:
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2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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17. Suppose the only
characteristic of beer that a consumer cares about is alcohol content.
Currently, Bud Light and Miller Lite both have the same alcohol content.
a. Illustrate the consumer’s indifference curves in a graph
with ounces of Miller Lite on the horizontal and ounces of Bud Light on the
vertical axis.
b. Suppose that the producers of Bud Light lower the price of
Bud Light. How will your answer to (a) change?
c. Suppose that the producers of Bud Light lower the alcohol
content of their beer by 50%. How will your answer to (a) change?
d. Since we identify tastes with indifference maps, would you
say that the consumer’s tastes have changed in (b) or (c)?
e. How could we change the units we use to measure Miller Lite
in order to get the indifference map in (c) to again look like the one in
(a)?
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ANSWER:
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a. The indifference curves are straight lines with
slope of -1.
b. The answer will not change — prices affect budgets, not
tastes.
c. The indifference curves will again be straight lines,
but this time with slope of -2.
d. While the indifference map has changed in (c), the
consumer’s tastes have not. Rather, the nature of the underlying product
has changed — and the same tastes that care only about alcohol content
therefore give rise to an indifference map that looks different.
e. If we changed the units of Miller Lite to
“half-ounces”, we would again have indifference curves that are straight
lines with slope of -1.
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POINTS:
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1
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DIFFICULTY:
|
A-Section Material
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|
QUESTION TYPE:
|
Subjective Short Answer
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HAS VARIABLES:
|
False
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DATE CREATED:
|
2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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18. Suppose the only
characteristic of beer that a consumer cares about is alcohol content.
Currently, Bud Light and Miller Lite have the same alcohol content.
a. Using to denote ounces of Miller Lite and to denote ounces
of Bud Light, what’s the simplest possible utility function that can describe
this consumer’s tastes over the two products.
b. Suppose Bud Light lowers its alcohol content by 50%. How
would you change the utility function to account for this?
c. Derive the MRS for
the functions in (a) and (b) — and interpret your answer.
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ANSWER:
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a.
b. or
c. In (a), MRS =
-1 — i.e. no matter what bundle the consumer consumers, she is always
willing to trade one Bud Light for one more Miller Lite.
In (b), MRS = -2 — i.e. no matter what
bundle the consumer consumes, she is always willing to trade 2 Bud Lights
(that now have half the alcohol content) for 1 more Miller Lite.
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POINTS:
|
1
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DIFFICULTY:
|
B-Section Material
|
|
QUESTION TYPE:
|
Subjective Short Answer
|
|
HAS VARIABLES:
|
False
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DATE CREATED:
|
2/11/2015 10:52 PM
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DATE MODIFIED:
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2/11/2015 10:52 PM
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19. Suppose you are very
picky about your outdoor BBQ experiences — and you need exactly 1 cup of
lighter fluid for each bag of charcoal you use. If you have either leftover
charcoal or leftover lighter fluid, you simply discard it.
a. With cups of lighter fluid on the horizontal and bags of
charcoal on the vertical axis, illustrate some of your indifference curves.
b. Suppose that your favorite charcoal has just gotten better
because the producer has infused the charcoal with half a cup of lighter
fluid per bag. How does your answer to (a) change?
c. How could you change the units in which lighter fluid is
measured on the horizontal axis to get your graph from (b) to look the same
as you original graph in (a)?
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ANSWER:
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a. The indifference curves would have an L-shape,
with the corner of each indifference curve lying on the 45 degree line.
b. The indifference curves would still be L-shaped, but
the corners of the curves would now lie on the 60-degree line; i.e. 1
charcoal bag is paired with half a cup of lighter fluid, 2 bags with 1 cup,
etc.
c. If we measure lighter fluid in half cups, we get back
the original graph.
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POINTS:
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1
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DIFFICULTY:
|
A-Section Material
|
|
QUESTION TYPE:
|
Subjective Short Answer
|
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HAS VARIABLES:
|
False
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DATE CREATED:
|
2/11/2015 10:52 PM
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DATE MODIFIED:
|
2/11/2015 10:52 PM
|
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20. Suppose you are
very picky about your outdoor BBQ experiences — and you need exactly 1 cup of
lighter fluid for each bag of charcoal you use. If you have either leftover
charcoal or leftover lighter fluid, you simply discard it.
a. Letting cups of lighter fluid be denoted as and bags of
charcoal as , give the simplest possible utility function that captures your
tastes.
b. Suppose that your favorite charcoal has just gotten better
because the producer has infused the charcoal with half a cup of lighter
fluid per bag. How does your answer to (a) change?
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ANSWER:
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a.
b. or
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POINTS:
|
1
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DIFFICULTY:
|
B-Section Material
|
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QUESTION TYPE:
|
Subjective Short Answer
|
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HAS VARIABLES:
|
False
|
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DATE CREATED:
|
2/11/2015 10:52 PM
|
|
DATE MODIFIED:
|
2/11/2015 10:52 PM
|
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