Microecnomics Exam

Intermediate Microeconomics Fall 2005 Midterm Exam Direction This is a mingy book, close notes exam there is 100 points possible, please pay guardianship 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 improvement functionpic. 1) Is the effrontery 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 both goods, food pic and habilitate pic. Her utility function is given by pic. The scathe 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) hypothecate that Natashas utility function is given by u(I) = I0. 5, where I represents annual income in thousands of dollars. 1) Is Natasha risk lov ing, risk neutral, or risk averse? Explain. ) bet 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 break to take a new-sprung(prenominal) job that offers a . 5 opportunity 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 protect 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) bet a consumer has the two period utility function picpic here picrepresent the sum of money of consumption in period 1 and 2 respectively. The consumers income consists full 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 gait of interest r. 1) Interpret the economic meaning of the parameter pic in the utility function. 2) Obtain the optimal allocati on ofpic, and illustrate it with the graph. 3) Explain how the optimal consumptions in periods 1 and 2 vary with A, r, andpic.