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Problem Set 2

This document contains a microeconomics problem set with 4 questions. Question 1 asks about consumer utility maximization given two consumption bundles and proposes finding an alternative bundle that yields higher utility. Question 2 involves calculating optimal consumption bundles and utilities for variations in income, prices, and a coupon. Question 3 asks to find the utility-maximizing mix of goods and required budget to reach a target utility level. Question 4 involves using the Lagrange method to find the optimal consumption bundle for an individual with Cobb-Douglas preferences.

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10 views2 pages

Problem Set 2

This document contains a microeconomics problem set with 4 questions. Question 1 asks about consumer utility maximization given two consumption bundles and proposes finding an alternative bundle that yields higher utility. Question 2 involves calculating optimal consumption bundles and utilities for variations in income, prices, and a coupon. Question 3 asks to find the utility-maximizing mix of goods and required budget to reach a target utility level. Question 4 involves using the Lagrange method to find the optimal consumption bundle for an individual with Cobb-Douglas preferences.

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alexking573
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Microeconomics Problem Set No 2

Winter term 2023/24


Claudia Salim, Paul Schweinzer and Norbert Wohlgemuth

1. Suppose you can afford purchasing 3 units of good x and 4 units of good y. You
discover that another affordable bundle of 5 units of x and 2 units of y provide
you with the same level of utility. Assume your utility function and budget
line are both well-behaved (see lecture slides 1-25 on consumer behaviour).
(a) Are you maximising your utility by consuming your original bundle (x, y) =
(3, 4)? Please explain.
(b) Using a figure, based on the two bundles, propose an alternative, af-
fordable bundle that would yield a higher utility level than either of the
original bundes.

2. Consider an individual with utility function U (x, y) = (x + 3)y, and income


I = 30. The price of x is px = 2, while py = 1.
(a) Find the optimal consumption bundle of this individual. Calculate the
utility at this optimal bundle.
(b) Assume that this individual’s income was increased by 10. What is
the new optimal consumption bundle now, and the corresponding util-
ity level?
(c) Assume now that the price of x decreases by 1, so that the new price
px = 1. I = 30. What is the new optimal consumption bundle now, and
the corresponding utility level?
(d) Assume that the individual receives a coupon allowing to consume 4 units
of x for free. I = 30, px = 2, py = 1. What is the new optimal consump-
tion bundle now, and the corresponding utility level?
(e) In which version of parts (b)-(d) is the individual best off? That is,
describe whether the consumer prefers the change in income from part
(b), the change in prices from part (c), or the coupon from part (d).
1 1
3. Eric’s utility function is U (x, y) = x 2 y 2 , and he faces prices px = 1 and py = 3.
His utility target, i.e., the level of utility he would like to obtain, is U ∗ = 20.
Find his utility-maximising mix of x and y and the required budget to obtain
his utility target.
Hint: Use the utility function and U ∗ = 20 instead of the budget constraint.

4. Ireen consumes food (measured by x) and clothing (measured by y). Her


preferences are described by the utility function U (x, y) = xy. The prices of
the two goods are px = 20 and py = 40, and her income I = 800.
(a) Find Ireen’s optimal consumption bundle (x, y) using the method of La-
grange (see lecture slide number 50).
(b) Find λ which measures Ireen’s marginal utility of income, given her in-
come of I = 800.

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