ECON 7110 Consumer and Firm Behaviour

The University of Queensland Semester 1 2021 Question 1 Three friends Alice Bob and Carol have the following individual preferences over the food they usually get: Chinese Indian and Italian. Alice Bob Carol Most preferred Chinese Italian Indian Indian Chinese Italian Least preferred Italian Indian Chinese Jointly they agree to determine their group preference as follows: Cuisine A is preferred to B if A gets the majority of votes against B in a two – alternative vote. • What is the group ’ s preference over Chinese and Indian food? • What is the group ’ s preference over Indian and Italian food? • What is the group ’ s preference over Chinese and Italian food? • Is the group ’ s preference over the three cuisines transitive? Why or why not? Question 2 In a discussion of tuition rates a university offiffifficial argues that the demand for admission is completely price inelastic. As evidence she notes that while the university has doubled its tuition (in real terms) over the past 15 years neither the number nor quality of students applying has decreased. Would you accept this argument? Explain brieflfly . (Hint 1: The offiffifficial makes an assertion about the demand for admission but does she actually observe a demand curve? What else could be going on? Hint 2: Think about the existence of potential substitutes. ) Question 3 Suppose there are only two goods: Beer and Milk. Tom ’ s preference over bundles of beer and milk is as follows: For any two bundles A = (bA mA) and B = (bB mB) (where b and m denotesthe amount of beer and milk respectively) A % B (i.e. “ A is at least as good as B ” ) if and only if: Either bA > bB; Or bA = bB and mA ≥ mB . In other words Tom cares fifirst and foremost about the amount of beer but if the two bundles contain the same amount of beer then he prefers having more milk to less. • Is Tom ’ s preference complete? If yes show why; if no give an example of two bundles between which Tom cannot compare. • Is Tom ’ s preference monotone? Strongly monotone? • Does Tom ’ s preference comply with the property of diminishing marginal rate of substi tution? 2 Requirements: 1111 | .doc file ‘

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