For each question, choose the alternative that best completes the statement or answers the question, and briefly explain why that alternative is best.

1. In the article, "Less Cost, More Risk," Michael Kinsley argues that

1. airplane travel is riskier than automobile travel.
2. the government should insist on airlines achieving the highest safety standards possible.
3. low-priced airlines should have the same safety standards as regular airlines.
4. low-priced airlines should have lower safety standards than regular airlines.

1. If the cost of producing good A rises and consumers’ incomes rise, then the equilibrium quantity of A will clearly fall, if

1. the demand for A is totally inelastic.
2. the supply of A is totally elastic.
3. A is a normal good.
4. A is an inferior good.

1. When deriving a demand curve for product B directly from a marginal utility curve for product B, [choose the alternative that is false]

1. the units along the vertical axis are both dollars (price) and utils (marginal utility).
2. you have to take into account the opportunity cost (in utils) of buying different amounts of B at different prices for B.
3. the demand curve that is derived is based on preferences measured in ordinal terms rather than cardinal terms.
4. the demand curve is negatively sloped.

1. When a competitive market is at an equilibrium,

1. consumer surplus plus producer surplus is a maximum.
2. consumer surplus plus producer surplus is a maximum and consumer surplus equals producer surplus
3. consumer surplus is greater than producer surplus

1. In the case of a budget line, with A as the horizontal good, B as the vertical good, and Y as income,

1. Y/P(B) is the horizontal intercept.
2. Y/P(A) is the vertical intercept.
3. –P(B)/P(A) is the slope.
4. the vertical intercept multiplied by P(B) = Y.

1. Natasha consumes at a point on her budget line where her MRS exceeds the magnitude of the slope of her budget line. As Natasha approaches her optimum point, she moves

1. down and left.
2. down and right.
3. up and left.
4. up and right.

PART II. (20 minutes)

Using budget lines and indifference curves:

1. (8 minutes)

Construct a demand curve for a product.

• Use a diagram
• Clearly label your diagram
• Clearly explain the steps you are taking

1. (12 minutes)

Separate the substitution effect from the income effect of your demand curve.

• Use a diagram
• Clearly label your diagram
• Clearly explain the steps you are taking

• You do not have to repeat your explanations from question (A)

1. (Extra Credit – 4 points out of 100)

If the good was an inferior good, how would this affect your answer to (B)?

• Briefly explain your answer.

1. D. This is true he says so that people who want to pay less for somewhat less safety can express their preferences.
2. D. If A is an inferior good then when income increases, demand will decrease. With both supply and demand decreasing then Q will clearly decrease (draw the diagram).
3. C. This is false, the demand curve is based on the cardinal measures of an MU curve.
4. B. This is the best answer. It is better than C, because at the competitive equilibrium it is not necessary that CS=PS.
5. D. The vertical intercept = Y/P(B), thus if you multiply it by P(B), you are left with Y.
6. B. Draw the diagram of a budget line intersecting an indifference curve from above, ie where the slope of the BL is flatter than the slope of the IC. You can see that in order to get to the point where the BL is tangent to an IC, you have to move down and to the right.

1. See Parkin, ch. 9
2. See Parkin, ch. 9
3. Q will be less than the substitution effect Q, because the negative income elasticity of an inferior good will mean that Q will decrease when you add the income effect to the substitution effect.