05 Jun Question Question 1 [10 points total]
Question
Question 1 [10 points total]
Below each statement, write whether the statement is true or false.
a) If the demand curve is a downward-sloping straight line, then the price elasticity of
demand is constant all along the demand curve. [2 points]
b) It is possible to have decreasing marginal products for all inputs, and yet have increasing
returns to scale. [2 points]
c) If there are increasing returns to scale, then costs per unit of output decrease as you move
downward and to the right along an isocost line. [2 points]
d) Average cost can never rise while marginal costs are declining. [2 points]
e) A Stackelberg leader will necessarily make at least as much profit as he would if he acted
as a Cournot oligopolist. [2 points]
Question 2: [20 points total] Recall Janis from our midterms. She realized that skipping lunch
to be able to buy cigarettes is affecting her performance in school. Janiss preferences changed,
and now she eats exactly nine sandwiches for every pack of cigarettes that she smokes. Janiss
allowance is $100 per month.
a) Use the graph 1 space to represent Janiss preferences, with packs of cigarettes on the
horizontal axis and sandwiches on the vertical axis, by drawing indifference curves that
pass through bundles (3,4), (2,16), and (15,8). [2 points]
1
Space for graph 1
Space for graph 2
2
b) If we label packs of cigarettes as 1 and sandwiches as 2 , write down a utility function
that represents Janiss preferences. Is this function unique? Explain your answer. [2
points]
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