Question

Harry derives utility from two goods: X and Y . He has an income of 100 dollars. Both X and Y cost 2 dollars per unit Given the utility function U = XY (MUx = Y and MUY = X), how many units of X and Y should Harry consume in order to maximize his utility?

(a) X=100,Y =0 (b) X=0,Y =100 (c) X=50,Y =50 (d) X=25,Y =50 (e) X=25,Y =25

10. A recent study by an economist working for Oceanic Airlines shows that income elasticity of demand for a plane ticket from Los Angeles to Sidney is eQ;I = 1.2. Jack Shephard is a regular passenger of Oceanic Airlines, who flies from Los Angeles to Sidney 50 times a year. As a response to 10% increase in his income, Jack is expected to áy from Los Angeles to Sidney

(a) 50 times a year. (b) 47 times a year. (c) 60 times a year. (d) 53 times a year. (e) 56 times a year.

11. Which of the following statements is wrong? (I) If the demand is elastic, as price goes down, total revenue goes up. (II) Income elasticity of demand for inferior goods is negative. (III) Cross-price elasticity for substitute goods is negative.

    (a) only (I).
    (b) (I) and (III).

    (c) only (II). (d) (I) and (II).

    (e) only (III).

Answer 1

ANS 1. OPTION E: X=25, Y=25

At equilibrium, MRSxy=Px/Py

Putting the value in the budget constraint:

Xpx+YPy=M

2X+2Y=100

2X+2X=100

4X=100

X=25

Y=25

ANS 2. OPTION E: 56 TIMES A YEAR

e=percentage change in demand/percentage change in income

Let x be the percentage change in demand

So change in demand would be equal to 12%

12% of 50=6

New demand=50+6=56

ANS 3. OPTION E: Cross-price elasticity for substitute goods is negative

Only this statement is wrong as cross price elasticity of substitute goods is positive as demand for a good increases when the price of its substitute good increases as the good becomes comparitively cheaper with respect to its substitute.