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Faculty of Economics and Political Science, English Section, Second Year, Intermediate Microeconomics Theory, Dr.

Heba Nassar, Dr. Abdel-Hameed Nawar Mr. Ahmed Ragab, Ms. Nesreen Seleem

Economics Department Cairo University Fall 2013

Tutorial (6) on Chapter (6): Demand (Q1) TRUE/FALSE:

(1) In Quasilinear Preferences, then for very high incomes the income offer curve is straight line parallel to one of the axes. (2) In economic theory, the demand for a good must depend only on income and its own price and not on the prices of other goods. (3) If two goods are substitutes, then an increase in the price of one of them will increase the demand for the other. (4) An Engel curve is a demand curve with the vertical and horizontal axes reversed. (5) If preferences are homothetic and all prices double while income remains constant, then demand for all goods is halved. (6) If preferences are homothetic, then the slope of the Engel curve for any good will decrease as income increases. (7) An inferior good is less durable than a normal good. (8) If consumers spend all of their income, it is impossible for all goods to be inferior goods. (9) Nada was maximizing her utility subject to her budget constraint. Then prices changed. After the price change she was better off. Therefore the new bundle costs more at the old prices than the old bundle did. (10) Tareqs utility function is U(x, y) = x + y1/2. Currently he is buying some of both goods. If his income rises and prices dont change, he will buy more of both goods. (11) Olivias utility function is x + y1/2. It is possible that if her income is very high, an increase in income will not make her spend more on y.
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(12) When other variables are held fixed, the demand for a Giffen good rises when income increases. (13) A consumer has the utility function U(x, y) = min{x, 2y}. If the price of good x is zero and the price of good y is p, then the consumers demand function for good y is m/2p. (14) Ahmad has a Cobb-Douglas utility function with exponents that sum to 1. Sally consumes the same two goods, but the two goods are perfect substitutes for her. Despite these differences, Ahmad and Sally have the same price offer curves.
(Q2) MULTIPLE CHOICE QUESTIONS:

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Nancy has homothetic preferences. When her income was L.E.1,000, she bought 40 books and 60 newspapers. When her income increased to L.E.1,500 and prices did not change, she bought a. 60 books and 90 newspapers. b. 80 books and 120 newspapers. c. 60 books and 60 newspapers. d. 40 books and 120 newspapers. e. There is not enough information for us to determine what she would buy. Mohammad consumes strawberries and cream but only in the fixed ratio of three boxes of strawberries to two cartons of cream. At any other ratio, the excess goods are totally useless to him. The cost of a box of strawberries is L.E.10 and the cost of a carton of cream is L.E.10. Mohammads income is L.E.200. a. Mohammad demands 10 cartons of cream. b. Mohammad demands 10 boxes of strawberries. c. Mohammad considers strawberries and cartons of cream to be perfect substitutes. d. Mohammad demands 12 boxes of strawberries. e. None of the above. Osama has L.E.10 to spend on cans of Coke and Pepsi, which he regards as perfect substitutes, one for one. Pepsi costs L.E.0.50 a can and Coke costs L.E.0.60 a can. Osama has 20 coupons, each of which can be used to buy 1 can of Coke for L.E.0.40. Which of the following bundles will Osama buy?
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a. 20 cans of Pepsi and no Coke b. 16 2/3 cans of Coke and no Pepsi c. 10 cans of Coke and 8 cans of Pepsi d. 10 cans of Coke and 12 cans of Pepsi e. None of the above. 4. Hatem unexpectedly inherits L.E.10,000 from a rich uncle. He is observed to consume fewer hamburgers than he used to. a. Hamburgers are a Giffen good for Hatem. b. Hamburgers are a normal good for Hatem. c. Hatems Engel curve for hamburgers is vertical. d. Hatems Engel curve for hamburgers is horizontal. e. Hatems preferences are not homothetic. Regardless of his income and regardless of prices, Amin always spends 25% of his income on housing, 10% on clothing, 30% on food, 15% on transportation, and 20% on recreation. This behavior is consistent with which of the following? a. All goods are perfect substitutes. b. Amins demands for commodities do not change when their prices change. c. Amin consumes all goods in fixed proportions. d. Amin has a Cobb-Douglas utility function. e. More than one of the above. Reem buys only two goods. Her utility function is CobbDouglas. Her demand functions have which of the following properties? a. Her demand for one of the two goods does not depend on income. b. Her demand for neither good depends on income. c. Her demand for each of the goods depends on income and on the prices of both goods. d. Her demand for each of the two goods depends only on her income and on the price of that good itself. e. One of the goods is an inferior good and the other is a normal good. Dina insists on consuming 2 units of milk per 1 unit of tea. If the price of tea is L.E.5 and the price of milk is L.E.3, then if Dina's income is m, her demand for tea will be

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a. m/5. b. 3m/5. c. 5c + 3w = m. d. 5m. e. m/11. 8. As you may know, Mungoites each have two left feet and one right foot. Their preferences for left and right shoes display perfect complementarity. Mungoites find shoes useful only in trios of two lefts and a right. The price of each type of shoe is L.E.10 a shoe, and Mungoites consume nothing other than shoes. A Mungoites Engel curve for right shoes has the equation: a. R = m/30. b. R = m - 10. c. R = 2m. d. R = 10m. e. R = m/10. If Zakis utility function is X4AXB, the price of apples is pA, the price of bananas is pB, and his income is m, then Charlies demand for apples will be a. m/(2pA). b. 0.25 pAm. c. m/(pA + pB). d. 0.80m/pA. e. 1.25pBm/pA. Where x is the quantity of good X demanded, the inverse demand function for X a. expresses 1/x as a function of prices and income. b. expresses the demand for x as a function of 1/px and income, where px is the price of x. c. expresses the demand for x as a function of 1/px and 1/m, where m is income. d. specifies 1/x as a function of 1/px and 1/m, where m is income. e. None of the above.

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(Q3) QUESTIONS & PROBLEMS:

1. Consider the following utility function: U(x1,x2)=x1x2; where the price vector is (p1,p2) and income is m. Holding constant p2=1 and m=12, vary p1 such that p1=1, p1=2, p1'=3; Derive and draw: a) P1 price offer curve; b) Consumer demand curve for x1 Now, holding constant p1=1 and p2=1, vary m such that m=4, m'=6, m'=12; Derive and draw c) income offer curve d) Engel curve for x1 2. Consider the following utility function: U(x1,x2)=x1x2; where the price vector is (p1,p2) and income is m. Holding constant p2=1 and m=12, vary p1 such that p1=1, p1=3, p1'=4; Derive and draw: c) P1 price offer curve d) Consumer demand curve for x1 Now, holding constant p1=1 and p2=1, vary m such that m=4, m'=6, m'=12; Derive and draw c. income offer curve d. Engel curve for x1 3. Consider this utility function: U(x1,x2) = min {x1,x2}; where the price vector is (p1,p2) and income is m. Holding constant p2=1 and m=12, vary p1 such that p1=1, p1=2, p1'=3; Derive and draw: e) P1 price offer curve f) Consumer demand curve for x1 Now, holding constant p1=1 and p2=1, vary m such that m=4, m'=6, m'=12; Derive and draw c. income offer curve d. Engel curve for x1
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4. Consider this utility function: U(x1,x2)=min {x1,x2}; where the price vector is (p1,p2) and income is m. Holding constant p2=1 and m=12, vary p1 such that p1=1, p1=3, p1'=4; Derive and draw: a) P1 price offer curve b) Consumer demand curve for x1 Now, holding constant p1=1 and p2=1, vary m such that m=4, m'=6, m'=12; Derive and draw c. income offer curve d. Engel curve for x1