Economics of Environmental Quality

Part 1: True and False Questions. (5 pts) Please write your answers into the following table! Otherwise you will lose 2 points. 1 2 3 4 5 1. The indifference curve of two perfect complement goods is a downward sloping straight line. A. True. B. False. 2. A budget constraint illustrates bundles that a consumer prefers equally, while an indifference curve illustrates bundles that are equally affordable to a consumer. A. True. B. False. 3. We assume ?more is better? in the consumer behavior theory. A. True. B. False. 4. The marginal rate of substitution is the slope of a budget constraint line. A. True B. False 5. The following indifference curves represent two consumers? preferences on the ?Acceleration? and the ?Interior space? when shopping for Ford cars. The Mustang (sports car) consumer values more on ?Acceleration? than ?Interior space?. The Explorer (family van) consumer values more on ?Interior space? than ?Acceleration?. So we can conclude that Figure 1 represents consumer who buys Explore and Figure 2 represents consumer who buys Mustang. A. True B. False 1 Part 2: Multiple Choices Questions. (5 pts) Please write your answers into the following table! Otherwise you will lose 2 points. 6 7 8 9 10 6. In each case, the budget constraint moves from BC-1 to BC ? 2. Horizontal axis represents good X and vertical axis represents good Y. Which of the graphs reflects a decrease in the price of good X? A. graph (a) B. graph (b) C. graph (c) D. graph (d) 7. Monica consumes two goods, iced tea and spaghetti. The price of iced tea is $2 per bottle. Her income is $500 per month. She spends all her income each month. She purchases 50 bottles of iced tea and 100 servings of spaghetti. What is the price of a serving of spaghetti? A. $2 B. $4 C. $10 D. $5 8. If the power plant decided to provide 0.8 MWH of electricity at the price $412. The Consumer Surplus for 0.8 MWH is ______. Round up to the nearest integer. 483 412 212 0.2 A. $40 B. $88 0.6 1.0 Quantity MWH 1.4 C. $294 D. $412 2 E. None of them 9. The demand curve for a product reflects the A. willingness to pay of the marginal buyer. B. revenue buyers will receive. C. cost to sellers of producing the product. D. seller’s profit from producing the product. 10. In the diagram below, you can find Indifference curves and Budget lines when a cosnumer purchases Good A and Good B. The dashed line indicates the added budget line in order to find either Compensating Variation (CV) or Equivalent Variation (EV). Which of the Panel demonstrate the procedure to find the Compensating Variation (CV) if the price of Good A decreases? A. Panel (a) B. Panel (b) C. Panel (c) D. Panel (d) 3 Part 3: Short Answer Questions (10 pts) 1. James has $90 to spend on burgers and hot wings. The price of burger is $6. The price of hot wings is changing. With different wing prices, James chose different Bundles A, B, or C. His indifference curves and budget lines are given in the following diagram. Remember both axes represent quantity. (a) Fill out the table. Income Burger Price How many burgers Hot Wing Price How many Hot Wings Bundle A $90 $6 Bundle B $90 $6 Bundle C $90 $6 (b) Pick Bundle C for example. Now double James? income, double the prices of burgers and hot wings. What will be the quantities of burgers and wings? (c) Plot the demand curve for hot wings with the price and quantity information you get from the table in (a). 4 2. Paolo and Maria enjoy going out to fancy restaurants for dinner and to diners for breakfast (not so fancy). Their total income to be spent on eating out is $1,000. On the diagram, the red curves U1 and U2 represent two of their indifference curves. The blue lines B1 and B2 represent budget lines when different prices of a fancy dinner. The green line H is parallel to B2. Points X, Y, and Z are consumer?s best choices at different prices and income. (Hint: In order to figure out the prices, think about what if the couple spends all$1,000 on Fancy dinners, and what if the couple spends all $1,000 on Dinner breakfast.) (1) What is the price for Dinner Breakfasts? a. $100 b. $200 c. $10 d. $20 (2) If the price of fancy dinner decreases from $400 to $100, the couple?s best choice will move from ______ to ______. a. Point X to Point Z b. Point Z to Point X c. Point Y to Point Z d. Point Z to Point Y e. Point X to Point Y f.

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