Microecnomics Exam

Intermediate Microeconomics Fall 2005 Midterm Exam Direction This is a close book, close notes exam thither is 100 points possible, please even up attention to the weights as you allocate your time the exam starts at 330 and ends at 500 sharp. Good luck 1. (25 points) Consider the utility functionpic. 1) Is the laying claim that more is better satisfied for both goods? 2) What is pic for this utility function? 3) Is the pic diminishing, constant, or increasing as the consumer substitutes pic for pic along an indifference curve? . (25 points) A consumer purchases two goods, pabulum pic and clothing pic. Her utility function is given by pic. The price of food is pic , the price of clothing is pic, and the consumers income is pic. 1) What is the demand function for clothing? 2) Is clothing a normal good in this case? 3. (25 points) Suppose that Natashas utility function is given by u(I) = I0. 5, where I represents annual income in thousands of dollars. 1) Is Natasha fortune loving, risk neutral, or risk averse? Explain. ) Suppose that Natasha is currently earning an income of $10,000 (I = 10) and can earn that income next year with certainty. She is offered a chance to take a new speculate that offers a . 5 probability of earning $16,000, and a . 5 probability of earning $5,000. Should she take the new job? 3) In (2), would Natasha be willing to buy insurance to defend against the variable income associated with the new job? If so, how much would she be willing to pay for that insurance? 4. (25 points) Suppose a consumer has the two period utility function picpic here picrepresent the amount of consumption in period 1 and 2 respectively. The consumers income consists just of inherited assets A in period 1, and there is no income in second period. If the remaining income is invested in an asset, it can earn a rate of interest r. 1) Interpret the economic meaning of the parameter pic in the utility function. 2) receive the optimal allocation ofpic, and illust rate it with the graph. 3) Explain how the optimal consumptions in periods 1 and 2 vary with A, r, andpic.