Question 1

Suppose the price of coffee increases, leading to an increase in the demand for tea. Which of the following best explains this outcome?

Accepted Answer

Coffee and tea are substitutes.

Question 2

A government sets a price ceiling below the equilibrium price for rental apartments. What is the most likely result in the market?

Accepted Answer

A shortage of apartments.

Question 3

If the price elasticity of demand for a product is $$E_P = -2$$, what does this imply about consumer responsiveness?

Accepted Answer

Demand is elastic; consumers are very responsive to price changes.

Question 4

Given the budget constraint $$I = P_1X_1 + P_2X_2$$, if the price of $$X_1$$ decreases while income and $$P_2$$ remain constant, what happens to the budget line?

Accepted Answer

The budget line rotates outward, increasing the intercept on the $$X_1$$ axis.

Question 5

A consumer maximizes utility where the marginal rate of substitution equals the price ratio. Which equation represents this condition?

Accepted Answer

$$MRS = \frac{P_x}{P_y}$$

Question 6

If a consumer’s indifference curves are straight lines, what does this imply about their preferences?

Accepted Answer

The consumer views the goods as perfect substitutes.

Question 7

Suppose a consumer’s marginal utility per dollar spent on good $$X is $$greater than that for good $$Y. $$What should the consumer do to maximize utility?

Accepted Answer

Buy more of good $$X$$ and less of good $$Y.$$

Question 8

Which of the following best describes the income effect when the price of a normal good falls?

Accepted Answer

The consumer feels richer and buys more of the good.

Question 9

If the cross-price elasticity of demand between two goods is negative, what does this indicate?

Accepted Answer

The goods are complements.

Question 10

A market experiences both an increase in demand and a decrease in supply. What is the most likely effect on equilibrium price and quantity?

Accepted Answer

Price rises, quantity is indeterminate.

Question 11

Suppose a consumer faces the following probabilities and payoffs: 50% chance of $$100 and 50% chance of 0. $$What is the expected value?

Accepted Answer

$$50$$

Question 12

Which of the following utility functions represents a risk-averse individual?

Accepted Answer

$$U(W) = \sqrt{W}$$

Question 13

A mutual fund is an example of which risk management strategy?

Accepted Answer

Diversification.

Question 14

If a person is indifferent between a certain $$40 and a lottery with a 50% chance of 100 $$and 50% chance of $0, what is their risk premium?

Accepted Answer

$$10$$

Question 15

Which of the following best describes the bandwagon effect?

Accepted Answer

People buy more of a good as more people buy it.

Question 16

A consumer’s demand for ramen noodles decreases as their income increases. What type of good is ramen noodles?

Accepted Answer

Inferior good.

Question 17

Which formula correctly calculates the variance of a lottery with two outcomes, $$X_1$$ and $$X_2$$, with probabilities $$Pr_1$$ and $$Pr_2$$?

Accepted Answer

$$\$$sigma^2$$ = Pr_1$(X_1$ - E(X))^2$ + Pr_2$(X_2$ - E(X))^2$

Question 18

Which of the following is an example of the endowment effect?

Accepted Answer

A person values a mug more after owning it than before.

Question 19

If a person’s choices reveal that they always choose bundle A over bundle B when both are affordable, what can we infer using revealed preference?

Accepted Answer

The person prefers bundle A to bundle B.

Question 20

Which of the following best explains why insurance companies can offer coverage at lower risk to themselves?

Accepted Answer

The law of large numbers reduces the risk through pooling.

Intermediate Microeconomics: Midterm 1 Study Guide (Chapters 1, 2, 3, 4, 5, 19)

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