ECON 2010: Microeconomic Theory 1 Fall 2019
Sample questions for final exam
1. What factors shift the demand curve?
Preferences of the Consumers
Income of the People
Changes in Prices of the Related Goods, such as substitutes or complements
Advertisement Expenditure
The Number of Consumers in the Market
Consumers' Expectations about Future Prices
2. Distinguish between shift in demand curve and movement along the demand curve.
shift in demand curve
1) The shift in the demand curve is when, the price of the commodity remains constant, but
there is a change in quantity demanded due to some other factors, causing the curve to
shift to a particular side.
2) Change in the position of the curve.
3) Demand Curve will shift rightward or leftward.
movement along the demand curve
1) Movement in the demand curve is when the commodity experience change in both the
quantity demanded and price, causing the curve to move in a specific direction.
2) Change along the curve.
3) Demand Curve will move upward or downward.
3. What is income-consumption curve? Draw an income-consumption curve.
Income-consumption curve: curve tracing the utility maximizing combinations of two goods
as a consumer’s income changes.
An increase in income, with the prices
of all goods fixed (food as 1$, and
clothing 2$).
Causes consumers to alter their choice
of market baskets. The baskets that
maximize consumer satisfaction for
various income A$10, B$20, D$30,
trace out the income-consumption
curve.
The shift to the right of the demand
curve in response to the increase in
income.
4. What is price-consumption curve? Draw a price-consumption curve.
price-consumption curve, tracing the utility maximizing combinations of two goods as
the price of one changes.
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A reduce in the price of food, with
income and the price of clothing
fixed($2). Cause this consumer to choose
a different market basket
The baskets that maximize utility of
various prices of food(A$2, B$1,
D$0.5)trace out the price-consumption
curve.
Which relates the price of food to the
quantity demanded.
6. Briefly explain the concept of marginal rate of substitution (by drawing a graph).
marginal rate of substitution: maximum amount of good than a consumer is willing to give
op in order to obtain one additional unite of another goods.
Marginal rates of substitution are graphed along an indifference curve which is usually
downward sloping and convex.
The MRS is the slope of the indifference curve at any given point along the curve.
When the law of diminishing marginal rates of substitution is in effect, the marginal rate of
substitution forms a downward, negative sloping, convex curve showing more consumption
of one good in place of another.
A consumer must choose between
hamburgers and hot dogs. to determine the
marginal rate of substitution, the consumer is
asked what combinations of hamburgers and
hot dogs provide the same level of
satisfaction. When these combinations are
graphed, the slope of the resulting line is
negative. This means that the consumer faces
a diminishing marginal rate of substitution:
the more hamburgers they have relative to
hot dogs, the fewer hot dogs they are willing
to consume. If the marginal rate of
substitution of hamburgers for hot dogs is -2,
then the individual would be willing to give
up 2 hot dogs for every additional hamburger
consumption.
5. State and explain three basic assumptions of consumer’s preference.
Completeness: preferences are assumed to be complete. Consumers can compare and rank
all possible baskets. Thus, for any two market baskets A and B, a consumer will prefer A to B,
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will prefer B to A, or will be indifferent between the two. These preferences ignore costs. A
consumer might prefer steak to hamburger but buy hamburger because it is cheaper.
Transitivity: Preferences are transitive. Transitivity means that if a consumer prefers basket A
to B and basket B to basket C m them the consumer also prefers A to C. If Eddie prefers
steak (good A) to chicken (good B), and prefers chicken (good B) to turkey (good C), then
Eddie should prefer steak (good A) to turkey (good C).
More is better than less: Goods are assumed to be desirable. Consumers always prefer more
of any good to less and more is always better even if just a litter better. Eddie will be happier
with 6 steaks and 2 chickens, than 4 steaks and 1 chicken.
7. Suppose that you have $100 and wish to buy food and clothing. The price of food is $4 per
unit and price of clothing $10 per unit. Now, price of food increases to $5 and further to $8
per unit. Draw the budget line corresponding to the price of clothing and three prices of food.
8. Distinguish between normal goods and Giffen goods with the help of graphs (hint: price
effect=substitution + income effect).
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9. Define elasticity of demand. Suppose, the demand function is Qd = 180 – 2P and supply
function is Qs = 5+0.5P. Calculate the price elasticity of demand and supply. Calculate also
consumer’s surplus and producer’s surplus.
In equilibrium 180-2P=5+0.5P, P=70,Q=40.
Elasticity of Demand = (-1/slope)(P/Qd)
Elasticity of Supply = (1/slope)(P/Qs)
rewriting the two equations in slope-intercept form we have
o Demand Equation: P =90 – (1/2)Qd
o Supply Equation: P = 2Qs– 10
Point Elasticity of Demand = [-1/(-1/2)][70/40] =3.5
Point Elasticity of Supply = [1/2][70/40] = 0.875
consumer’s surplus=1/2*Qd* ∆ p=0.5*40*20=400 * ∆ p=90-70=20
p(highest)=180-2p=0 p=90
consumer’s surplus=1/2*Qd* ∆ p=0.5*40*60 * ∆ p=70-10 p(lowest)=5+0.5p=0
p=10
10. What is indifference curve? Why can two indifference curves not intersect each other?
Briefly explain with a series of statements.
An indifference curve is a graph showing combination of two goods that give the consumer
equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is
indifferent between the two and all points give him the same utility.
all combinations of good A and good B that
lie on the same indifference curve make the
consumer equally happy. all other
combinations on both curves would have to
provide the same level of satisfaction as well.
However, if we compare point B and point C,
we can clearly see that point C offers more of
good A and good B (90 and 140) as compared
to point B (80 and 130). consumers always
prefer larger quantities. Therefore it is
impossible for both curves to provide the
same level of satisfaction, which means they
can never intersect.
11. Define price ceiling and price floor. Draw a graph with demand supply curves and indicate
deadweight losses resulting from price ceiling and price floor.
The government has decided that price is too high and mandated that the price can be
no higher than a maximum allowable ceiling price. Pmax. The result is producers will
produce less and the quantity supplied will be drop to Q1. But customers will demand
more at this low price, they would like to purchase the Q2. There will have shortages.
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Price floor is a minimum price that buyers are expected to pay for a product. Let the
price about equilibrium, less customers want to buy and producers are produce more.
That lead to surplus.
Deadweight loss: price controls result in a net loss of total surplus. This deadweight loss
is an inefficiency cause by price control, the less in producer surplus exceeds the gain in
consumer surplus.
12. Calculate the fictional gain or loss of industry resulting from price ceiling and price floor.
Define elasticity of demand. Suppose, the demand function is Qd = 180 – 2P and supply
function is Qs = 5+0.5P.
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14. If the government arbitrarily set the price $80, calculate fictional gain
or loss of the industry. Calculate also the deadweight loss, consumer’s surplus and producer’s
surplus.
15. Refer to question no. 9. If the government arbitrarily set the price $60, calculate fictional gain
or loss of the
13. Explain the concepts of consumer’s surplus and producer’s surplus? Draw a graph with
demand and supply curves and identify consumer’s surplus and producer’s surplus.
Consumer A would pay $10 for a good whose
market price is $5 and therefore enjoys a
benefit of $5.
Consumer B enjoys a benefit of $2, and
Consumer C, who values the good at exactly
the market price, enjoys no benefit.
Consumer surplus, which measures the total
benefit to all consumers, is the yellow-shaded
area between the demand curve and the market
price.
Producer surplus measures the total profits of
producers, plus rents to factor inputs.
It is the benefit that lower-cost producers enjoy
by selling at the market price, shown by the
green-shaded area between the supply curve
and the market price.
Together, consumer and producer surplus
measure the welfare benefit of a competitive
market.
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