Question 1 If the cross price elasticity of demand equals -1, then the two goods areAnswerboth normal.both inferior.complements to one another.substitutes to one another.5 points Question 2 If there are only two goods and these are consumed in fixed proportions, the price elasticities of demand for these two goods will sum toAnswer0.0-0.5-1.0a number between 0 and -1.5 points Question 3 With only two goods, if the income effect is in the opposite direction as the substitution effect but the income effect dominates then the good isAnswernormalinferior but not GiffenGiffenThere is not enough information to answer.5 points Question 4 Suppose demand can be written as P = 5. The elasticity of demand is)Answerincreasing as price rises.decreasing as price rises.constant regardless of prices and perfectly elastic.constant regardless of prices and unit elastic.5 points Question 5 If the income elasticity of demand is 2, the good isAnswera luxury.a normal good (but not a luxury).an inferior good.a Giffen good.5 points Question 6 If income doubles and the quantity demanded of goodXmore than doubles, then goodXcan be described as aAnswersubstitute good.complement good.necessity.luxury.5 points Question 7 An increase in the price of goodXwill be accompanied byAnswera shift in the market demand curve for goodX.a shift in the market demand curve for goodY(a substitute for goodX).a movement along the market demand curve for goodX.Both b and c.5 points Question 8 The inelasticity of demand for gasoline in the short runAnswermakes no theoretical sense.makes sense because there are very few substitutes.makes little sense because there are very few substitutes.is more pronounced in the long run.5 points Question 9 The lump sum principle suggests that the tax that reduces utility the least isAnswera tax on incomea tax on a good with many substitutesan equal tax per-unit on all goodsa tax on a good with only a few substitutes5 points Question 10 Suppose.strayer.edu/courses/1/ECO301001VA016-1152-001/ppg/respondus/exam_Week_3_Quiz/img4d3472831.jpg” alt=””>and the price of X is 1, the price of Y is 1 and income is $12. If the price of X increases to 2, the income effect (in terms of units of X bought) isAnswer2-10-25 points Question 11 Suppose a lottery ticket costs $1and has a jackpot of $1,000. What must the probability of winning nothing be if the bet is fair?Answer99%99.9%99.999%99.9999%5 points Question 12 Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years) and has a utility functionU=V1/2(whereVis the number of healthy vacation days they experience). Suppose they are not a particularly healthy family and the probability that someone will have a vacation ruining illness (V= 0) is 30%. What is the expected value ofV?Answer107305 points Question 13 Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99%. What must the jackpot be for this to be a fair bet?Answer101001,00010,0005 points Question 14 A gamble can be described as âfairâ if the expected value of the gamble (including any costs of play) isAnswerpositive.zero.negative.one.5 points Question 15 Suppose a lottery ticket costs $1 and the probability that a holder will win nothing is 99.9%. What must the jackpot be for this to be a fair bet?Answer101001,00010,0005 points Question 16 People who choose not to participate in fair gambles are calledAnswerrisk takers.risk averse.risk neutral.broke.5 points Question 17 Suppose a risk-neutral power plant needs 10,000 tons of coal for its operations next month. It is uncertain about the future price of coal. Today it sells for $60 a ton but next month it could be $50 or $70 (with equal probability). How much would the power plant be willing to pay today for an option to buy a ton of coal next month at todayâs price? (Ignore discounting over the short period of a month.)Answer54305 points Question 18 Suppose a lottery ticket costs $1and has a jackpot of $1 million. What must the probability of winning nothing be if the bet is fair?Answer99%99.9%99.999%99.9999%5 points Question 19 Suppose a family has saved enough for a 10 day vacation (the only one they will be able to take for 10 years) and has a utility functionU=V1/2(whereVis the number of healthy vacation days they experience). Suppose they are not a particularly healthy family and the probability that someone will have a vacation-ruining illness (V= 0) is 20%. What is the expected value ofV?Answer108205 points Question 20 Risk aversion is best explained byAnswertimidity.increasing marginal utility of income.constant marginal utility of income.decreasing marginal utility of income.
