Chapter 3 & 4.

In this chapter we will analyze consumer choices and Utility Maximization Steps. Consider a two-
good world, x and y. One consumer wishes to maximize utility, denoted U(x, y). His/Her problem
is then to Maximize:

Unless there is a Corner Solution, this solution will occur where the highest indifference curve is
tangent to the budget constraint. Equivalent to that is the statement: The Marginal Rate of
Substitution equals the price ratio:

The solution will be then understand as the application of Lagrange Function:

Solve for this we can get the “optimal condition” as:

Noticeably, if there is the case that the exercise will provide you value of Price, Income, you can replace it
to your final results. Lastly, there is several typical cases for this kind of exercises as follows:

After you review this notes, you also can take a deep look on the Appendix in chapter 4 which
reveals clearly different types of functions.

Now, applying these theoretical formulate, you can solve the following exercises:
Ex 1.
For the following utility functions,
• Find the marginal utility of each good.
• Determine whether the marginal utility decreases as consumption of each good increases (i.e.,
does the utility function exhibit diminishing marginal utility in each good?).
• Find the marginal rate of substitution.
• Discuss how MRSXY changes as the consumer substitutes X for Y along an indifference curve.
• Derive the equation for the indifference curve where utility is equal to a value of 100.
• Graph the indifference curve where utility is equal to a value of 100
a. U(X,Y) = 5X + 2Y
b. U(X,Y) = X0.33Y0.67
c. U(X,Y) = 10X0.5 + 5Y
Solution for Ex 1.
Ex 2.
 Solution for exercise 2

Notes: for this kind of exercise, firstly you can think about the “optimal condition”:

Then you can apply the ratios to the income budget constraint, add value of Price, and income:
I = xPx + yPy.
After that, because this is the situation of perfection subtitle, you have ratio:
Px/Py = slope (–dy/dx).
If the exercise didn’t provide you price value or income, you can conclude: “the consumer will have to
give up 3 unit of product y to increase consumption of 1 unit of product x for the demand function.”
Secondly, if the exercise provide you the price value, you cab review to Dr. Chon’s lesson that you should
compare different cases as follows:

i.

 Come back to the previous answer.

ii.
MUx/Px > MUy/Py (corner solution for X)

 You will buy more X than Y that we have corner solutions at X, so buy only X and no Y (Similar
to this exercise, buy more x1, but zero x2.)

iii.
MUx/Px < MUy/Py (corner solution for Y)
 You will buy more Y than X that we have corner solutions at Y, so buy only Y and no X
Ex 3.
Solution for Ex 3.
You can apply Lagrange Function or easily apply Cobb-Douglas Function (appendix chapter 4) to find
quantity of X and Y.
Ex 4.

Katie likes to paint and sit in the sun. Her utility function is U(P,S ) = 3PS + 6P, where P is the
number of paint brushes and S is the number of straw hats. The price of a paint brush is $1 and the price
of a straw hat is $5. Katie has $50 to spend on paint brushes and straw hats.
a. Solve Katie’s utility-maximization problem using a Lagrangian.
b. How much does Katie’s utility increase if she receives an extra dollar to spend on paint brushes
and straw hats?
Solution for Ex 4.

a.

b.
We need to solve for the Lagrange multiplier λ. From above,
λ = 3S + 6 = 0.6P

Substituting for the optimal values of S or P gives λ = 18. Therefore, Katie’s level of utility would
increase by 18 units if she receives an extra dollar to spend.
This is the end the extra typical exercise. I have also attached some more reference exercise
different types of Utility function and exercise, you can read and figure the solution.