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Maximizing Maurice's Utility in Entertainment

This document outlines 9 practice problems related to concepts in microeconomics including: 1) The shape of indifference curves and marginal rate of substitution for perfect substitutes and complements. 2) How the marginal rate of substitution changes along convex and linear indifference curves. 3) Drawing and labeling an indifference curve for a given utility function. 4) Computing marginal rates of substitution from utility functions. 5) Explaining how budget constraints are affected by changes in income and prices using diagrams. 6) Solving a consumer optimization problem using a Cobb-Douglas utility function. 7) Deriving expressions for demand, price elasticity and income elasticity from a utility function. 8) Determining

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46 views2 pages

Maximizing Maurice's Utility in Entertainment

This document outlines 9 practice problems related to concepts in microeconomics including: 1) The shape of indifference curves and marginal rate of substitution for perfect substitutes and complements. 2) How the marginal rate of substitution changes along convex and linear indifference curves. 3) Drawing and labeling an indifference curve for a given utility function. 4) Computing marginal rates of substitution from utility functions. 5) Explaining how budget constraints are affected by changes in income and prices using diagrams. 6) Solving a consumer optimization problem using a Cobb-Douglas utility function. 7) Deriving expressions for demand, price elasticity and income elasticity from a utility function. 8) Determining

Uploaded by

Shubham Kumar
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

ECO101: Introduction to Economics (Summer Semester, 2019)

Tutorial Problem Set – 02

1. Comment on the shape of IC and nature of MRS for the following:


(a) Perfect Substitutes
(b) Perfect Complements

2. What happens to the MRS as you move along a


(a) Convex indifference curve?
(b) A linear indifference curve?

3. Mary’s utility function is u(x,y) = max{x, 2y}. On a graph, draw and label the
indifference curve where u(x,y)=10.

4. Ann has a utility function given by u(x1, x2 ) = x12+2x1x2+x22 .


(a) Compute Ann’s marginal rate of substitution, MRS(x1, x2).
(b) Ann’s cousin, Andrew, has a utility function v(x1, x2) = x2 + x1. Compute,
Andrew’s MRS.

5. Assume an economy in which John can spend his budgets (£M) on purchasing two
goods X and Y. Use an appropriate diagram to explain your answer:
(a) How will John’s budget constraint be affected if his income increases
permanently?
(b) How will John’s budget constraint be affected if the price of good X
increases?
(c) Assuming that John has smooth preferences, graphically define his
equilibrium consumption of the two goods.

6. The Utility function for two goods are given by U(x,y) = x1/3 y1/2 . Prices of two goods
are px = 2 and py = 5 and income (M) is 40.
(a) Find out the marginal utility of X and Y, its MRS(x,y) and budget constraint.
(b) Set up the optimization problem and also determine the FOCs
(c) Compute the utility maximizing consumption bundle and also maximized
value of utility
7. If U = Xα Yβ is an individual’s utility function for two goods. Taking px and py as their
fixed prices and also M as the individual fixed income.
(a) Find out the marginal utility of X and Y and its MRS(X,Y)
(b) Determine the generalized expression for X and Yin terms their prices and
income.
(c) Deduce the price elasticity and income elasticity of X and Y.

8. Maurice has the following utility function: U(X,Y) = 20X + 80Y - X2 - 2Y2, where X
is his consumption of CDs, with a price of $1, and Y is his consumption of movie
videos, with a rental price of $2. He plans to spend $41 on both forms of
entertainment. Determine the number of CDs and video rentals that will maximize
Maurice’s utility.

9. Suppose the utility function U(x, y) = x + ln(y) represents someone’s preferences for
goods x and y. Let I denote income, px the price of x and py the price of y.
(a) Calculate the marginal rate of substitution and show why at the optimal
consumption point it must be equal to the relative price of x and y.
(b) Derive the optimal demands for x and y as functions of income and prices.

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