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Assignment One

The document outlines an assignment consisting of eight problems related to consumer utility functions and budget constraints. Each problem requires the application of economic principles, such as Lagrange multipliers and utility maximization, to determine optimal consumption bundles and utility levels. The assignment is due by 9 am on December 2, 2024.

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therealm0001
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20 views1 page

Assignment One

The document outlines an assignment consisting of eight problems related to consumer utility functions and budget constraints. Each problem requires the application of economic principles, such as Lagrange multipliers and utility maximization, to determine optimal consumption bundles and utility levels. The assignment is due by 9 am on December 2, 2024.

Uploaded by

therealm0001
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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Assignment One

Instruction: This assignment must be submitted on or before 9 am on


December 2, 2024.

1. A consumer’s utility function is given by 𝑈 =∝ 𝐼𝑛𝑥1 + 𝛽𝐼𝑛𝑥2 . Find the values of 𝑥1 and
𝑥1 which maximize utility subject to the budgetary constraint 𝑃1 𝑥1 + 𝑃2 𝑥2 = 𝑀

2. A consumer’s utility function is given by 𝑈(𝑥1 , 𝑥2 ) = 2𝑥1 𝑥2 + 3𝑥1 . Where 𝑥1 and 𝑥2


denote the number of items of two goods 𝐺1 and 𝐺2 that are bought. Each item costs $1 for
𝐺1 and $2 for 𝐺2 . Use Lagrange multipliers to find the maximum value of U if the
consumer’s income is $83. Estimate the new optimal utility if the consumer’s income rises
by $1.

3. A consumer’s utility function 𝑈(𝑥, 𝑦) is given by 𝑈 = 30𝑥 2⁄5 𝑦 1⁄3 , where 𝑥 is the number
of units of good 𝐺𝑋 and 𝑦 the number of units of good 𝐺𝑌 . Each unit of 𝐺𝑋 costs ₦1 and
each of 𝐺𝑌 costs ₦2. If the consumer’s total income 𝑌 = ₦1,100, find the maximum utility
𝑈𝑚𝑎𝑥 for the consumer and verify the fulfilment of sufficient condition

4. Find the optimum commodity purchase for a consumer whose utility function and budget
constraint are 𝑞11.5 𝑞2 and 3𝑞1 + 4𝑞2 = 100 and verify that the values of 𝑞1 and 𝑞2 obtained
are maximized.

5. Let a consumer’s utility function be 𝑈 = 𝑞16 𝑞24 + 1.5𝐼𝑛𝑞1 + 𝐼𝑛𝑞2 and his budget constraint
3𝑞1 + 4𝑞2 = 100.
a. Find his optimum commodity bundle of 𝑞1 and 𝑞2 .
b. Verify whether second order is fulfilled or not.
c. Determine the marginal utility of money
d. Estimate the new optimal utility if the consumer’s income rises by ₦1
⁄ ⁄
6. Diogo has a utility function 𝑈(𝑞1 , 𝑞2 ) = 𝑞13 4 𝑞21 4 , where 𝑞1 is pizzas and 𝑞2 is burritos. If
the price of burritos, 𝑃2 , is $2, the price of pizzas, 𝑃2 , is $1, and Y is $100, what is Diogo’s
optimal bundle? Is Diogo really satisfied at the optimal bundle obtained?
7. Andy Purchases only two goods, apples (a) and kumquats (k). He has an income of $40
and can buy apples at $2 per pound and kumquats at $4 per pound. His utility function is
𝑈(𝑎, 𝑘) = 3𝑎 + 5𝑘. What are his marginal utility for apples and his marginal utility for
kumquats? What bundle of apples and kumquats should he purchase to maximize his
utility? Why?
8. Given the utility function and budget constraint as 𝑈 = 2𝑞1 𝑞2 + 𝑞2 and 𝑀 =
𝑝1 𝑞1 + 𝑝2 𝑞2 respectively. Construct ordinary and compensated demand
function for 𝑞1

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