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Problem Set 2

The document presents a problem set for ECO 503, focusing on quasilinear utility functions, marginal utilities, and consumer preferences. It includes various tasks such as finding optimal consumption bundles, analyzing demand based on income and prices, and demonstrating the convexity of preferences. The problems involve mathematical derivations and applications of utility theory in consumer choice scenarios.

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3 views2 pages

Problem Set 2

The document presents a problem set for ECO 503, focusing on quasilinear utility functions, marginal utilities, and consumer preferences. It includes various tasks such as finding optimal consumption bundles, analyzing demand based on income and prices, and demonstrating the convexity of preferences. The problems involve mathematical derivations and applications of utility theory in consumer choice scenarios.

Uploaded by

zsiam14
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

ECO 503 Problem Set 2

1. Suppose the preference relation ↭ are represented by a quasilinear utility function of the form u (x1 , x2 ) = g (x1 ) + x2 ,

where g is a continuous increasing function. Show that if g is concave then ↭ are convex.

2. Suppose a consumer has preferences over two goods X and Y that can be represented by the quasilinear utility function
→
U (x, y) = 2 x + y.

(a) Find the marginal utilities, M Ux and M Uy .

(b) Is the monotonicity assumption satisfied for this consumer?

(c) Does the marginal utility of X diminish, remain constant, or increase as the consumer buys more x?

(d) Find the marginal rate of substitution, M RSx,y = M Uy ,


M Ux
as a function of x and y. Is M RSx,y diminishing, constant,

or increasing as she chooses a higher level of x?

(e) Now find her Marshallian demand for x when she faces prices px and py and has income I (assuming an interior

solution). Show that at an interior optimum, her demand for x does not depend on her income level.

(f) Now find her Marshallian demand for Y . How does her demand for Y depend on her income level? How does her

demand for Y change as px changes?

3. Show that the preferences represented by the utility function u (x1 , x2 ) = min {x1 , x2 } are convex. You should know that

this utility function is used to represent preferences when the two goods are perfect complements.

4. Roy’s preferences over Burgers (B) and Salads (S) are given by U (S, B) = SB + 10 (S + B). If the price of a burger is $9

and the price of a salad is $3, and Roy can spend a combined total of $30 each day on these goods, find Roy’s optimal

consumption basket.

5. Jubair’s utility function is U (x, y) = x2 y, he has income I = 240 and faces prices px = 8 and py = 2. Find Jubair’s optimal

consumption bundle, given his income and prices.

6. Fairuza has utility function U (x, y) = x + y, and she has an income of I = 4.

(a) Find all optimal bundles for Fairuza when she faces prices px = 1 and py = 1.

(b) Find all optimal bundles for Fairuza when she faces prices px = 1 and py = 2.

1
(c) What is her demand for Y when px = 1 and py = 1? What is demand for Y when px = 1 and py > 1? What is

demand for Y when px = 1 and py < 1?

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