Problem Set 3 Solutions

1. Here, U (S, B) = SB + 10(S + B). Notice that here marginal utilities are linear (so not diminishing marginal
p1
utilities), and here we may not have an interior solution, so the M RS = p2 method may not work. But let’s

try it anyway to see what goes wrong.

M US B+10 pS 3
Here, M US = B + 10, M UB = S + 10. So M RSS,B = M UB = S+10 . Setting this equal to pB = 9 = 13 , we

get the equation

B + 10 1
=
S + 10 3
3B + 30 = S + 10

S = 3B + 20

Plugging this condition into the budget constraint, which will hold with equality because of monotonicity of

preferences, we get

pS S + pB B = 30

3S + 9B = 30

3 (3B + 20) + 9B = 30

9B + 60 + 9B = 30

18B = −30
30
∴B = −
18

Now, eating − 30
18 burgers is not physically possible (except in really gross fast food joints), so we must have

a corner solution with B = 0, and spend all the money on salad, so 3S = 30 and S = 10. What is the reason

for this corner solution?

M US B+10
Notice that the marginal utility of spending one more dollar on salad is pS = 3 and for a burger it is
M UB S+10 10
pB = 9 . Even when B = 0 and S = 10, the marginal utility of a dollar spent on salad is 3 ≈ 3.33,
20
which is greater than 9 ≈ 2.22, the marginal utility of a dollar spent on a burger, and if you increase B from
M US M UB
0 (and decrease S from 10), pS gets even bigger and pB gets even smaller, so at the current income level,

1
 spending one more dollar on Salad always adds more utility than spending one more dollar on Burger, hence

Roy should spend all his money on Salad.

2. Here, U (x, y) = x2 y. Given the utility function, it’s easy to see we won’t have a corner solution, because

choosing either x = 0 or y = 0 leads to a utility level of 0, whereas positive amounts of both goods gives a
px
higher utility. So we can use the M RS = py trick. So,

M Ux px
=
M Uy py
2xy 8
=
x2 2
4y = 8x

∴ y∗ = 2x∗

Plugging this in his budget constraint, we get

px x∗ + py y ∗ = I

8x∗ + 2 (2x∗ ) = 240

12x∗ = 240

∴ x∗ = 20

∴ y∗ = 40

√
3. Here, U (x, y) = 2 x + y

∂U (x,y) 1 ∂U (x,y)
(a) M Ux = = 2 2√ = √1 ; M Uy = = 1.
∂x x x ∂y

(b) Yes, monotonicity is satisfied.

(c) You can easily see that √1 decreases as x increases. If you can’t, you can take the derivative of √1 and
x x

see that it is negative for any x > 0, so M Ux is diminishing.

√1
M Ux x
√1 .
(d) Here, M RSx,y = M Uy = 1 = x
This is decreasing in x, however, does not change as y changes. This

is a property of quasilinear preferences, where M U and M RS is constant in quantity of the numeraire

good (the good that enters the utility function linearly).

px √ py

py
2
(e) For an interior solution, M RSx,y = √1
x
= py , so x= px and optimal x∗ = px . We can see that her

demand does not depend on income.

2
 (f) Now, as monotonicity is satisfied, the budget constraint must hold with equality, so

p x x∗ + p y y ∗ = I
 2
py
px + py y ∗ = I
px
2
(py )
+ py y ∗ = I
px
2
(py )
py y ∗ = I−
px
I py
∴ y∗ = −
py px

Her demand for y changes linearly as I changes. Basically, for a fixed price ratio, she spends a constant
(py )2
amount px on x, and spends the rest of her income on y. This is true for any interior solution with

quasilinear preferences.

√
4. Emily’s preferences are given by the utility function U (x1 , x2 ) = 32 x1 + 2x2 . Also, p1 = 2, and p2 = 1.
32
√
M Ux1
√8 ,
2 x1
(a) For Emily, M RSx1 ,x2 = M Ux2 = 2 = x1 which is diminishing as x1 increases.
p1
(b) Suppose m ≥ 32. Then, the M RS = p2 condition gives us

8 2
√ =
x1 1
√
x1 = 4

∴ x∗1 = 16

Notice that the optimal level of food is independent of income. However, as p1 = 2, Emily will need an

income of at least 32 in order to buy 16 units of food. So as long as m ≥ 32, we have x∗1 = 16.

(c) For this part, we will need to find her optimal consumption level of clothing as well. Because she will

exhaust her budget, we have

p1 x∗1 + p2 x∗2 = m

(2) (16) + (1) x∗2 = m

∴ x∗2 = m − 32

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 For U (x1 (p1 , p2 , m) , x2 (p1 , p2 , m)), we compute the marginal utility of income as follows:

dU ∂U ∂x1 ∂U ∂x2
= +
dm ∂x1 ∂m ∂x2 ∂m
32
= √ (0) + 2 (1)
2 x1
= 2

Because the marginal utility of income is a constant, it does not change with her level of income. This

is because Emily spends all of her added income on clothing only, which has a constant marginal utility.

(d) If instead we had m < 32, then she does not have enough income to buy 16 units of food. In that case,
M U x1 √16 M U x2 M U x1
√8
x1
we see that p1 = 2 = x1 and p2 = 2; when x1 < 16, p1 > 2. This tells us that her

marginal utility of spending one more dollar on food is higher than her marginal utility of spending one

more dollar on clothing, which means she should spend all of her income on food, so x∗1 = m
p1 = m
2, and

x∗2 = 0. In this case,

dU ∂U ∂x1 ∂U ∂x2
= +
dm ∂x1 ∂m ∂x2 ∂m
 
32 1
= √ + 2 (0)
2 x1 2
8 8
= √ = pm
x1 2

So in this case, her marginal utility does depend on her level of income.