Choose the best alternative to complete each statement below.

ECONOMIC

Choose the best alternative to complete each statement below.

1/2 ECO2CFC Intermediate Microeconomics 1. Choose the best alternative to complete each statement below. [1 point x 5] (i) In the theory of producer choice, the function that transforms a combination of different inputs into the technologically feasible maximum output is called a) the cost function. b) the maximum cost function. c) the production function. d) the isoquant. (ii) In the short run, a profit‐maximising producer chooses to stop producing the good when the unit price of the good is not as high as her a) average cost of production. b) average fixed cost of production. c) average variable cost of production. d) marginal cost of production. (iii) In the standard theory of consumer choice, it is assumed that a consumer will choose a) her most preferred bundle of goods and services that are technologically available. b) her most convenient bundle of goods and services that are the latest in the markets. c) her most preferred bundle of goods and services that she can afford. d) the cheapest bundle of goods and services that she can use for the longest time. (iv) Diagrammatically, the market demand curve is simply a) the horizontal summation of individual demand curves. b) the vertical summation of individual demand curves. c) the horizontal multiplication of individual demand curves. d) the vertical integration of individual demand curves. (v) Which statement violates preference transitivity? a) She strictly prefers bundle A to bundle B. She strictly prefers bundle B to bundle C. She strictly prefers bundle A to bundle C. b) He is indifferent between bundle A and bundle B. He strictly prefers bundle C to bundle B. He strictly prefers bundle C to bundle A. c) She weakly prefers bundle A to bundle B. She weakly prefers bundle A to bundle C. She is indifferent between bundle B and bundle C. d) He strictly prefers bundle C to bundle B. He weakly prefers bundle B to bundle A. He is indifferent between bundle C and bundle A. 2/2 2. Consider two goods A and B that are perfect substitutes for the consumer under consideration. Using two linked diagrams (one on top of the other), illustrate and explain a derivation of her individual demand for good A. The top diagram should illustrate her utility maximisation, while the bottom diagram should illustrate her demand curve. Do not use more than one A4 page in answering this question. [5 points] 3. Using one diagram, illustrate and explain typical relationships between the short‐run average costs, long‐run average cost, short‐run marginal costs and long‐run marginal cost of production. Do not use more than one A4 page in answering this question. [5 points] 4. Consider two goods, good 1 and good 2. Denote the unit price of good 1 by p1, and that of good 2 by p2. Denote the amount of good 1 by x1, and that of good 2 by x2. A consumer has allocated a budget, denoted by m, to buy those two goods. Her preferences can be represented by the following Cobb‐Douglas utility function: u(x1, x2) = (x1) a (x2) 1 – a with 0 < a < 1 a) What is the marginal utility of good 1? Answer in words in one or two sentences. [1 point] b) Derive the mathematical expression for the marginal utility of good 1, and then use the expression to show that it is diminishing. [1 point] c) What does the marginal rate of substitution between two goods measure? Answer in words in one or two sentences. [1 point] d) Derive the mathematical expression for the marginal rate of substitution between the two goods. [1 point] e) The Cobb‐Douglas utility function above suggests that the marginal rate of substitution is diminishing as the level of one good in the bundle increases. What is the economic intuition behind this? In other words, what implicit assumption about the consumer’s preferences is contained in the Cobb‐Douglas utility function? Answer in a few sentences. [1 point] f) Formulate and solve mathematically her problem of finding the most preferred bundle that she can afford, using the Lagrangian method. [3 points] g) The utility‐maximising bundle should contain the optimal quantities of the two goods. Draw her demand curve for good B, using the expression for the optimal amount of good B. [2 points]