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Assignment 2

The document outlines Homework 2 for an Intermediate Microeconomics course, which includes three questions related to utility functions, budget constraints, and optimal consumption bundles. It requires students to analyze indifference curves, the effects of income and price changes on purchasing power, and to determine an optimal consumption bundle for a consumer named George. The homework is due on December 16, 2024, and carries a weight of 10% towards the final mark.

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3 views

Assignment 2

The document outlines Homework 2 for an Intermediate Microeconomics course, which includes three questions related to utility functions, budget constraints, and optimal consumption bundles. It requires students to analyze indifference curves, the effects of income and price changes on purchasing power, and to determine an optimal consumption bundle for a consumer named George. The homework is due on December 16, 2024, and carries a weight of 10% towards the final mark.

Uploaded by

dima.bukreev
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Department of Economics, Accoun ng and Finance

Fall Semester 2024


Intermediate Microeconomics
ECON-361
Homework 2

This work carries a 10% weight on your inal mark.

Upload your answers to the following questions by 16 December 2024.

Question 1
Suppose a consumer has preferences between two goods represented by the utility function:

U = X, Y

For this utility function MUX =y, MUY =x9.

1. On a graph draw the indifference curve associated with the utility level U1= 128 and
answer the following:

a. Does the indifference curve intersects either axis?


-No it doesn’t, because Y cannot be equal to 0

b. Does the shape of the indifference curve indicate that the MRSX,Y is diminishing?
- As x increases, MRSX,Y decreases (in absolute value), indicating a diminishing
marginal rate of substitution. This occurs because the consumer's willingness to
substitute y for x diminishes as they consume more of x.
ti
f
2. On the same graph draw a second indifference curve, U2=200. Show how the
MRS X,Y depends on x, y and use the information to determine if MRS X,Y is
diminishing for this utility function.

Question 2
Suppose that a consumer’s income (I) doubles and that the prices PX and PY of both goods in his
consumption basket also double. He views the doubling of income as “good news” because it
increases his purchasing power. However the doubling of prices is “bad news” because it decreases
his purchasing power. His problem is to assess the net effect of the “good news” and the “bad news”.
Can you help him to understand?

Assume that he had the Budget for this 2 goods = B,


The budget constraint for those 2 goods were -> B = PX⋅X+PY⋅Y
After doubling his Income his Budget also doubled -> 2B = PX⋅X+PY⋅Y
Then the prices doubled -> 2B = 2PX⋅X+2PY⋅Y -> B = PX⋅X+PY⋅Y

So basically he is in same position regarding those 2 goods, BUT the difference between I and B
increased, so it is “good news” for him.
Example:
Income = I = 10,000
Budget for goods X and Y = B = 1000

Before After
Remaining money = I - B = 10,000 - 1,000 = 9k Remaining money = 20,000 - 2,000 = 18k

So remaining money for the rest of his consumption basket is also doubled, but prices remain
the same, so his purchasing power increased in general.
Question 3
George purchases food (measured by x) and clothing (measured by y) and has the utility
function U(X,Y) = xy. His Marginal Utilities are MUX = y and MUY = x. He has a smooth income of
€800. The price of food is PX = €20 and the price of clothing is PY = €40.
Find George’s optimal consumption bundle.

1.
y/20=x/40
y=x/2

2.
Px*x + Py*y = I
20x + 40y = 800

3.

Answer: 20 units of food, 10 units of closing.

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