ECON2131/6034 Public Sector Economics
Tutorial 1
The public sector in a mixed economy
Multiple choice – Review of consumer theory
Note: In the questions below Istands for income, px for price of good x and py or price of goody.
1. Suppose that at current consumption levels an individual's marginal utility of consuming an extra hotdog is 10 whereas the marginal utility of consuming an extra soft drink is 2. Then the number of hot dogs the individual is willing to give up to get one more soft drink is
(a) 5.
(b) 2.
(c) 1/2.
(d) 1/5.
2. An increase in an individual's income without changing relative prices will
(a) rotate the budget constraint about the x-axis.
(b) shift the indifference curves outward.
(c) shift the budget constraint outward in a parallel way.
(d) rotate the budget constraint about they axis.
3. The slope of the budget constraint line is
(a) the ratio of the prices (px/py).
(b) the negative of the ratio of the prices (px/py).
(c) the ratio of income divided by price of y (I/py).
(d) none of the above.
4. If the price of x falls, the budget constraint
(a) shifts outward in a parallel fashion.
(b) shifts inward in a parallel fashion.
(c) rotates outward about the x-intercept.
(d) rotates outward about they-intercept.
5. If the prices of all goods increase by the same proportion as income, the quantity demanded of good x will
(a) decrease.
(b) increase.
(c) remain unchanged.
(d) change in away that cannot be determined from the information given.
6. Assume x andy are the only two goods a person consumes. If after a rise in pX the quantity demanded of y increases, one could say
(a) the income effect dominates the substitution effect.
(b) the substitution effect dominates the income effect.
(c) it is still impossible to determine whether the substitution or income effect dominates.
(d) none of the answers are correct.
7. An individual's demand curve
(a) represents the various quantities that a consumer is willing to purchase of a good at various price levels.
(b) is derived from an individual's indifference curve map.
(c) will shift if preferences, prices of other goods, or income change.
(d) all of these answers are correct.
8. If the compensated and ordinary demand curves for a good intersect, at that point the ordinary demand curve will be
(a) flatter if this is a normal good.
(b) steeper if this is a normal good.
(c) flatter if this is an inferior good.
(d) horizontal.
9. If an individual's utility function is given by U(x, y) = and I = 100, px = 1, py = 4,his or
her preferred consumption bundle will be:
(a) (20,20)
(b) (50,12.5)
(c) (40,15)
(d) (30,15)
10. If an individual's utility function is given by U(x, y) = 2x + y and px = 2, py = 3, I = 50, this person will choose:
(a) (10, 10).
(b) (15, 6.67).
(c) (25, 0).
(d) (0, 50/3).
Discussion - Topic 1: The public sector in a mixed economy
1. For each of the following programs, identify one or more “unintended” consequences:
(a) Rent control
(b) Minimum wages
(c) Agricultural price supports
(d) Providing health insurance to children who currently are underinsured (Hint: Think about the US where a large proportion of the population is uninsured)
(e) National testing standards for schools
2. Discuss the applications of the following economic principles to the public sector: (a) Scarcity, choice and opportunity cost
(b) Welfare
(c) Marginal benefit and cost
(d) Price theory
(e) Efficient production