Intermediate Microeconomics I Reviewer
Midterm Examination 2

Justin Raymond S. Eloriaga

Directions: Solve each of the following numbers and show the basis behind your computation.
I. Given U* =

!
"#

+

%&"#
"'

,

E’ = * −

%&"# #
"'

!

%&"#

"#

"'

, X 2* = −

, P1 = 8, P2 = 2, m = 32

1. How many units of good 2 will you buy? What is your maximum utility level?
2. Calculate for the Hicksian Demand Function of Good 2
3. Suppose the price of good 2 increases to Php 4, ceteris paribus.
a. Calculate the Substitution Effect of the Increase in the Price of Good 2
b. Calculate the Income Effect of the Increase in the Price of Good 2
c. What is the compensation after the increase in the price of good 2 is necessary to restore your utility to its original level? Briefly discuss what is going on as you answer this question?
4. Calculate the compensating variation of the increase of P2 to Php 4
5. Calculate the equivalent variation of the increase of P2 to Php 4
6. Calculate the change in Marshallian Consumer Surplus of the increase of P2 to Php 4
II. Given X1* =

!
"'

−

%&"'
"#

, P1 = 2, P2 = 4, m = 32

1. Calculate the uncompensated own-price elasticity of demand for good 1. Is the demand for good 1 price elastic, inelastic or unit elastic? Why?
2. Calculate the uncompensated cross price elasticity for good 1 with respect to P2. Interpret your result.
3. Calculate the uncompensated cross price elasticity of demand for good 2 with respect to P1. Interpret your result. 4. Calculate the income elasticity of demand for good 1. Is good 1 normal or inferior? [If good 1 is normal, is it a luxury or a necessity?]
5. Calculate the compensated cross-price elasticity of demand for good 1 with respect to P2
6. Calculate the income elasticity of demand for good 2. Is good 2 normal or inferior? [If good 2 is