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Ps 2

This document outlines 4 problems for an economics homework assignment on consumer theory and utility maximization. Problem 1 asks to sketch indifference curves and write utility functions consistent with the curves for two consumption bundles. Problem 2 provides a utility function and asks questions about marginal utility, marginal rate of substitution, and indifference curve slopes. Problem 3 asks whether statements about inferior goods, consumer rationality, and demand are true or false. Problem 4 provides a Cobb-Douglas utility function and asks to derive demand curves, indifference curves, income expansion paths, Engel curves, and assess properties of the goods. The assignment is due on March 16.

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Cindy Wu
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25 views2 pages

Ps 2

This document outlines 4 problems for an economics homework assignment on consumer theory and utility maximization. Problem 1 asks to sketch indifference curves and write utility functions consistent with the curves for two consumption bundles. Problem 2 provides a utility function and asks questions about marginal utility, marginal rate of substitution, and indifference curve slopes. Problem 3 asks whether statements about inferior goods, consumer rationality, and demand are true or false. Problem 4 provides a Cobb-Douglas utility function and asks to derive demand curves, indifference curves, income expansion paths, Engel curves, and assess properties of the goods. The assignment is due on March 16.

Uploaded by

Cindy Wu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Problem Set 2

Due date: March 16

Problem 1: Indifference Curves and Utility Functions

For each of the following, sketch a plausible set of indifference curves and write down a
possible form of the utility function that is consistent with your graph.

1. Amy always needs to use spoons (x) and chopsticks (y) together. Having a spoon is
useless without a pair of chopsticks and vice versa.

2. Betty likes blue pens (x) and black pens (y). She is indifferent between them.

Problem 2: Utility Functions

A consumer has the following utility function:

u(x, y) = 4x2 y 4

1. Calculate marginal utility of x and y at an arbitrary bundle (x, y).

2. Calculate MRS at an arbitrary bundle (x, y).

3. What is the slope of the indifference curve at the consumption bundle (1,1)?

4. What is the MRS at the consumption bundle (1, 1)?

Problem 3: True or False

For each of the following statements, indicate whether they are True or False. Justify your
answer.

1. The observed decrease in the number of children that couples have on average in the
US coincides with the huge increase in disposable income experienced in the last
decades by both men and women. This is evidence that children are inferior goods.

2. Suppose two consumers have the same utility and the same income. If they choose
different consumption bundles, then one of them must be irrational.

3. Consider a situation with only two goods, x and y. It is possible for one of the goods
to be inferior, but they can’t both be inferior at the same time.

4. As price falls along a given demand curve for apples, quantity demanded and total
utility increase; marginal utility and consumer expenditure remain constant.

1
Problem 4: Demand Curves

Consider a Cobb-Douglas utility function:

U (x, y) = xα y 1−α

for α ∈ (0, 1). Let the price of x be px , price of y be py , and total income be m.

(a) Set up the utility maximization problem.

(a) Suppose α = 21 . Plot the indifference curve when utility level is held constant at
U =1

(b) Find the demand curves for x and y.

(c) Now suppose α = 41 , Plot the indifference curve when utility level is held constant at
U =1

(d) Find the demand curves for x and y.

(e) What happens to consumption of good x as income increases? What about the share
of income spent on good x?

(f) What happens to consumption of good x as px increases? What happens if py


increases?

(g) Compute the Marginal Rate of Substitution, and find its derivative with respect to α.
Can you relate this derivative to your plot?

(h) Find the inverse demand curves for x and y using an arbitrary α.

(i) You may assume α = 12 , px = 2, py = 1 for all the parts below. Show this preferene
relation is homothetic.

(j) Find and Draw the income expansion path.

(k) Derive and Draw the Engel curves for x.

(l) (T/F/U) x and y are substitutes.

(m) (T/F/U) x is a normal good.

(n) (T/F/U) x is a giffen good.

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