ECON 301

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  1. If the utility function u(x1,x2) =min(x1,x2) represents a consumer's preferences, then another utility function,v(x1,x2) = min(x1,x2)+ 2 also represents her preferences

    U(x1,x2) and V(x1,x2) will represent the same preferences, since the operations of taking square root, adding a constant and taking the square of a function are all monotone transformations.
  2. A consumer considers apple pie and ice cream perfect complements. Then, his preferences are homothetic?

    By definition, all perfect substitutes, perfect complements and Cobb-Douglas functions are all homothetic preferences.
  3. If marginal products are declining this means that the underlying technology exhibits decreasing returns to scale.

    Diminishing marginal productivity and returns to scale are two entirely different concepts that do not correlate to one another.
  4. Carrie and Don both have Cobb-Douglas preferences over corn (good 1) and dairy (good 2). Carrie's utility function is X1^C X2^1-c and Don's x1^d x2^1-c.

    If Carrie spends a higher proportion of her income on corn than Don does c>d?

    Both equations are proportionate to one another. Should Carrie spend more income on core, then the Cobb-Douglas preferences over corn will be higher.
  5. At any output level the short run average total cost curve and the short run average variable cost curve must slope in the same direction.

    Average total cost curve and short run average variable converge.
  6. For a Giffen good, the negative income effect dominates the positive substitution effect as the price of the good decreases

    In the Giffen goods situation, the income effect dominates, leading people to buy more of the goods, even as its price rises.
  7. If preferences were given by u(x1;x2) =x21x2; then both goods must be normal goods
    True. This is a Cobbs-Douglas function and both equations

    x1= 2/3 m/p1


    x2 = 1/3 m/p2

    Have income elasticities of one. Thus both are normal goods.
  8. A tangency condition is always both sufficient and necessary condition for utility maximization

    In general the tangency condition is only a necessary condition for optimality, but not sufficient.

    Optimality should satisfy two conditions (1) the tangency condition and (2) the budget line.
  9. More than one utility function can represent a person's preferences and two consumers with the same utility function can have different preferences

    Any monotonic transformation of a utility function is also a function that can represent the same preference
  10. In the case of quasi-linear utility functions, the indifference curves are horizontal translate of each other

    In the case of a utility function that is linear in good 1
  11. If a utility function is homothetic then the Engel curve is a straight line from the origin.

    If preferences are homothetic, it means that when income is scaled up or down by t>0;the demanded bundle,(x1;x2) scales up or down by the same amount, i.e., the new bundle is(tx1;tx2)
  12. 12. Income effect is zero if the utility function is quasi-linear

    Because in the case of a quasi-linear preferences, the entire change in demand is due to the substitution effect (because a shift in income causes no change in demand for good 1, for instance, when preferences are quasi-linear)
  13. Substitution effect is always positive if we have perfect complement good

    There is no substitution effect in the case of perfect complements
  14. Income effect = total effect, if we have perfect substitute good.

    The total effect is due to substitution effect in case of perfect substitution, i.e., there is no income effect
  15. If a consumer's preferences are not transitive, then they can not be represented by a utility function.

    Actually, for a preference relation to exist, the first three axioms of consumer preference should be satisfied. In particular, preferences should be complete, transitive, and reflexive.
  16. For a Giffen good, the negative income effect dominates the positive substitution effect as the price of the good decreases
    True. Slutsky equation
  17. Mary always consumes one slice of cheese cake with a cup of coffee. If coffee costs more than before, Marie's consumption of cheese cake must fall

    There is no substitution effect in such a case. The total effect on the consumption of the good is due to income effect.
  18. Angela considers Coke and Pepsi as perfect substitutes. If the price of Coke goes up, Angela will be strictly worst off.
    False. If the price of Coke goes up, Angela will spend her income on Pepsi.
  19. Indifference curves will never intersects

    • An indifference curve represents all points where different combinations
    • of consumption yield the exact same level of utility (satisfaction). Different indifference curves are based on different levels of utility.
    • A graph will show the equal levels of utility. A higher utility will simply mean an indifference curve that is farther away from the origin
    • that a lower utility. It's simply a matter of what the graph is designed to show.
  20. Convexity of indifference curves ensures that the consumers will never specialize in one good
    True. Averages are preferred to extremes
  21. A proportional increase in the prices and income will leave the consumer on the same budget constraint
    True. See equation.
  22. Indifference curves exhibit diminishing marginal rate of substitution
    False. Only convex indifference curves exhibit diminishing MRS.
  23. For homothetic preferences, the income o┬žer curve will always be a ray, i.e., a straight line through the origin
    True. See Slutsky equation.
  24. The demand curve of a Giffen good is, like any other good, downward sloping
    True. See Slutsky.
  25. If a consumer has perfect complements preferences, then neither of the two goods she consumes can be a luxury good
    True. No luxury good has a perfect complement.
  26. A consumer always chooses the consumption bundle that maximizes her marginal utility given her budget constraint
    False. max utility given the budget constraint
  27. The SE and IE reinforce each others, i.e., have the same sign, if the good is normal
    True. See Slutsky equation.
  28. Two firms employ the same factors of production to produce the same product. Their technologies both exhibit constant returns to scale. Thus, if the factors that Firm 1 uses are exactly twice the amount of those Firm 2 uses, Firm 1 must produce twice the output that Firm 2 produces

    Although both firms have technologies that exhibit CRS, we do not know whether they are using the same technology. The statement would be true if they are
  29. If the marginal cost curve lies above the average cost curve, then the average cost curve must be sloping upward
    True. See graph.
  30. The short-run cost function is always greater than the long-run cost function
    False. The short-run cost function and the long-run cost function can coincide
  31. Increasing returns to scale is incompatible with the law of diminishing marginal product.
    True. Returns to scale is a long-run phenomenon, while diminishing marginal product is a short-run one.Therefore, both of them can not hold for a firm at the same time
  32. If the average product of an input is falling, then the average product must exceed the marginal product at that input level
    True. Graph
  33. If the production function exhibits increasing returns to scale, average cost must be decreasing
    True. Graph
  34. Knowing a Firm's production function is sufficient information for determining the firm's efficient combination of inputs?
    • False. The cost function should be known too. The firm's problem is min C = w1x1 + w2x2
    • subject to f(x1,x2) = y
  35. If marginal cost is rising, then average cost must also be rising
    False. MC attains its minimum before the AC.
  36. When Marginal cost curve attains its minimum, the marginal product is at its maximum
  37. A profit maximizing firm will always minimize cost
  38. When MC is increasing, AVC must be increasing too
    False. See the graph
Card Set
ECON 301
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