AAU Microeconomics Mid-Exam

Addis Ababa University
College of Business and Economics

Department of Economics
Test I on Microeconomics I (Econ 1021)

Time allowed: 1:30
Name: __________________________ ID. No.___________ Section: _______
Part I: Choose the correct answer and put your answers ONLY on the answer sheet
provided (1 point each). Do not mark any answer on the question paper.
1. Assume there are only two goods. If more of good 1 is always preferred to less, and if less of
good 2 is always preferred to more, then:
A) indifference curves slope downwards
B) indifference curves slope upwards
C) indifference curves may cross
D) indifference curves could take the form of ellipses
E) None of the above
2. Suppose that the price of good X triples and the price of good Y quadruples while income
remains constant. On a graph where the budget line is drawn with X on the horizontal axis
and Y on the vertical axis, the new budget line:
A) is flatter than the old one and lies below it
B) is flatter than the old one and lies above it
C) crosses the old budget line
D) is steeper than the old one and lies below it
E) is steeper than the old one and lies above it
Jenifer is planning to consume two goods (good x and good y) with a limited budget. If
Jennifer’s budget line has intercepts 20 units of good x and 30 units of good y and price of good
y (PY) is $10. Then, answer the next three questions.
3. Calculate Jennifer’s income and Price of good x (Px)

A) Income = 300 and Px = 15
B) Income = 3000 and Px = 30
C) Income = 30 and Px = 20
D) Income = 3000 and Px = 20
E) Income = 600 and Px = 10
1
4. What is the simplified version of budget line equation of Jenifer?
A) Y = -1.5X + 30 C) Y = -0.67X + 20 E) Y = -3X + 60
B) Y + 3X = 30 D) -1.5X + Y – 30 = 0
5. If Jenifer’s Utility function is given by U(X; Y) = X0.8Y0.2, how many units of good X and
good Y would she consume if she choose the bundle that maximize her utility subject to her
budget constraint?
A) X = 10 & Y = 15 C) X = 20 & Y = 10 E) X = 5 & Y = 15
B) X = 6 & Y = 16 D) X = 16 & Y = 6
6. On a typical supply and demand diagram, consumer surplus is the area

A) between the supply and demand curves
B) above the supply curve and below price line
C) below the demand curve and above price line
D) below the entire demand curve
E) above the entire demand curve
7. If there are only two goods (good x and good y), an increase in the price of good x will
increase the demand for good y:
A) whenever both goods are normal goods.
B) only if the two goods are perfect substitutes.
C) only if the two goods are perfect complements.
D) if and only if the price elasticity of demand for good y is greater than 1 in
absolute value.
E) whenever good y is Giffen good.
8. Assume that Mr. Dawit has a demand function for a computer cable that is given by the
equation Qx = 100 - Px. If the initial price of a computer cable is 65, and later the price
decreases to 50. By how much Dawit’s consumer surplus has changed?
A) Increase by 637.5
B) Decreases by 637.5
C) Increase by 612.5
D) Increases by 1250
E) Increases by 1862.5
9. The utility-maximizing rule is to choose the basket of goods that

A) has the highest marginal utility of each good in the basket
B) has the lowest prices for the goods.
C) has the highest value of marginal utility to price for each good.
D) the marginal utility to price ratio equal for all goods in the basket.
E) the marginal utility to price ratio equal for all goods in the basket subject to the
income constraint.
2
10. A Giffen good is characterized by one of the following
A) A downward sloping Engle, but upward sloping Income Consumption Curve
B) a decline in the quantity demanded as price rises
C) Income effect re-enforces the substitution effect
D) Income effect limits the substitution effect, while the former exceeds in
magnitude.
E) Income effect opposite to the substitution effect, while the later exceeds in magnitude.
11. If she spends all of her income on trouser (same brand and size) and shoe during Christmas
shopping, Wongel can afford 4 trousers and 4 pairs of shoes. She could also use her entire
budget to buy 8 trousers and 2 pairs of shoes. If the price of a trouser is 500 Birr, how much
is Wongel’s income allocated for Christmas shopping?
A) 6800 Birr
B) 3000 Birr
C) 6000 Birr
D) 6500 Birr
E) None of the above.
12. If Wongel’s Utility function is given by U=T1/2S1/2, where T is Trousers and S is Pair of
Shoes. What is the optimal combination of Trousers and Pair of Shoes for Wongel?
A) 6 trousers and 3 pairs of shoes
B) 3 trousers and 6 pairs of shoes
C) 3 trousers and 5 pairs of shoes
D) 6 trousers and 3 pairs of shoes
E) 5 trousers and 3 pairs of shoes
13. Assume there is a good called “good x”. When the price of good x decreases, the substitution
and income effects change demand in the opposite direction.
A) good x must be a Giffen good
B) good x must be an inferior good
C) good x must be a normal good
D) good x can be either an inferior or Giffen good
E) Not enough information to determine the nature of good x
14. One of the following is true about perfect substitutes goods

A) A straight and horizontal indifference curve
B) Constant Marginal Rate of Substitution (MRS)
C) Marginal rate of substitution always equal to 1
D) Can be represented by U(X;Y ) = X2 + bY
E) All except D
3
15. The demand for voice mail is Qx = 1000 - 150Px + 15M. Assume that per capita disposable
income (M) is $800. At a price of good x (Px) of $50 the income elasticity of demand is
A) 1.50 B) 5.0 C) 1.0 D) 15 E) 2.18
16. Intersection between two indifference curves implies

A) Only intransitive preferences
B) Only inconsistent preferences
C) intransitive and inconsistent preferences
D) rational choice of consumers
E) All except C
Part II: Workout Question (4 points)
1. Assume a consumer has the following demand function for good X:

X(PX, M) = M/10PX – 10,
where PX is the price of good X and M is income of the consumer. Suppose also that income of
the consumer is 1200 birr and initial price of good X is 3 birr. If the price of good X increases to
6 birr, calculate the
A) Substitution Effect (2 points)
B) Income Effect (2 points)

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Addis Ababa University

College of Business and Economics

Test I on Microeconomics I (Econ 1021)

Name: ____________________ ID. No._ Section: ___

3. Calculate Jennifer’s income and Price of good x (Px)

6. On a typical supply and demand diagram, consumer surplus is the area

9. The utility-maximizing rule is to choose the basket of goods that

14. One of the following is true about perfect substitutes goods

16. Intersection between two indifference curves implies

Part II: Workout Question (4 points)

1. Assume a consumer has the following demand function for good X:

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