Question

1. If Fred’s marginal utility of pizza is 10 and his marginal utility of salad is 2, then:

1. he will eat five times as much pizza as salad
2. he would give up five salads to get the next pizza
   
3. he would give up five pizzas to get the next salad
   
4. he will eat five time as much salad as pizza

2. The Aliens from Deneb offer Melissa a choice between 5 gujhbol and 3 hjkho. Melissa, having never experienced either can’t decide which she would prefer. In this situation which of our axioms of rational choice is Melissa violating?

1. Completeness
2. Transitivity
3. Continuity
4. Monotonicity
5. Convexity

3. When the price changes, which of these utility functions gives a consumer Marshallian demands that demonstrate no substitution effect?

1. All of the above
   
2. None of the above

4. Which of the following is not a correct property of Marshallian Demand functions:

1. They are functions of income and prices.
2. They are inflation proof, if all prices and income double Marshallian demand is unchanged
3. Their partial derivative, with respect to own price, measures the total effect of a price change.
4. They are the solution to the consumers utility maximization problem
5. All these are properties of Marshallian demand functions

5. Consumer Welfare measures derived from Hicksian demand suffer from which problem(s)?

1. Hicksian demand is a purely theoretical construct, not empirically observed, so these measures involved assuming a specific form for utility
2. Hicksian demand depends on an income effect that we don’t theoretically want to include in the measurement.
3. There are two possible Hicksian demand curves for any price change, since that also changes utility
4. All of the above
5. A and B only
6. A and C only

Answer 1

1. Fred's MU from pizza is 10 while from salad is 2. Now this is based on the ordinal approach. Knowing this let's understand the options -

A. This cannot be true. The number of pizzas and salads he eats will depend on his Budget constraint and prices. Also if MU of 1 salad is 2, it doesn't mean that 5 units of salad will give him 5×2=10 MU because the law of diminishing marginal utility operates here.

B. To know how much salad he would give up to get the next pizza we must know the marginal rate of substitution which measures substitutability between two goods. It is the slope of the indifference curve. Mathematically slope of IC = change in pizza(y)/change in salad(x) = MU from salad(MUx)/MU for pizza(MUy) = 2/10=1/5 = change in pizza/change in salad. So we see from the value that for 1 pizza he gives up 5 salads. So correct option.

C. From the value calculated above we can infer that to obtain 5 salad, 1 pizza will be sacrificed. So for 1 salad 0.2 pizza is sacrificed. Incorrect option.

D. Incorrect. As explained in the first option the law of diminishing marginal utility operates here and we cannot infer a conclusion like this without prices and budget constraint.