MICROECONOMICS
Tutorial # 1
Submitted by:
Rashid Ali I202521045
Arooj Fatima I202521052
Nada Raef I202521038
Submitted to:
Dr. Jin Di, ZHENG
Question # 1
Consider Amy’s preference over two goods, bread and yogurt. For each of the following scenarios, draw
two indifference curves U1 and U2, with U2 > U1 to represent Amy’s preference. Put bread on the
horizontal axis and yogurt on the vertical axis. (The quantity of bread and yogurt consumed do not need
to be integers.)
(a) Amy likes both bread and yogurt, and always gets the same satisfaction from 2 pieces of bread as she
does from 1 cup of yogurt.
(b) Amy likes both bread and yogurt, but she wants exactly 2 pieces of bread for every cup of yogurt.
(c) Amy likes bread but hates yogurt. Eating yogurt generates disutility for her, i.e., eating yogurt reduces
her level of satisfaction. For each cup of yogurt she consumes, she always needs 2 pieces of bread to
offset the disutility from the consumption of 1 cup of yogurt.
Solution
(a). To Amy, 2 piece of bread and 1 piece yogurt are the perfect substitutes and gets the same level of
satisfaction.
Marginal Utility of Bread (MUx)=2
Marginal Utility of Yogurt (MUy)=1
Marginal Rate of Substitution (MRSx,y)=1/2=1/2
Slope of indifference= -0.5
The figure is given below:
2.
5
1. U2
5
1
U1
0.
5
0
0 0. 1 1. 2 2. 3 3. 4 4.
5 5 5
Bread 5 5
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(b). Amy likes both bread and yogurt, but she wants exactly 2 pieces of bread for every cup of yogurt. Ans:
To Amy, 1 cup of yogurt is equal to 2 pieces of bread are the perfect complements.
The figures are given below:
U2
2
1.5 U1
1
Yogurt
0.5
0
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Bread
(c). Amy likes bread but hates yogurt. Eating yogurt generates disutility for her, i.e., eating yogurt
reduces her level of satisfaction. For each cup of yogurt she consumes, she always needs 2 pieces of bread
to offset the disutility from the consumption of 1 cup of yogurt.
For Amy, eating yogurt generates disutility or reduces her level of satisfaction. So, in order to offset the
disutility Amy is consuming 2 pieces of bread for 1 cup of yogurt.
So, (0,0) is indifferent to (2,1)
And (0,0) preferred to (0,2)
(0,2) indifferent to (2,3)
The diagram is shown below:
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3.5
U1
3
2.5
U2
Yogurt
1.5
1
0 0.5 1 1.5 2 2.5 3 3.5 4 4.5
Bread
Question # 2
Suppose a consumer has preferences over two goods that can be represented by the utility function U(x,y)
= 2√x+y.
(a) Is the assumption that more is better satisfied for both goods? Based on your answer, what can you
conclude about the shape of the indifference curves?
(b) Does the marginal utility of y diminish, remain constant, or increase as the consumer buys more y?
(c) Derive the equation of MRSx,y. Is the MRSx,y diminishing, constant, or increasing as the consumer
gets more x and less y along an indifference curve? Based on your answer, what can you conclude about
the shape of the indifference curves?
(d) On a graph with x on the horizontal axis and y on the vertical axis, draw the indifference curve U = 5.
Indicate on your graph whether the indifference curve will intersect either or both axes.
Solution
Given Utility Function
U(x , y)= 2 √𝑋 + y
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(a) Is “more is better” satisfied for both goods?
Good y:
∂u/∂y = 1>0 ⇒ yes.
Good x:
∂u/∂x = 1/√𝑥 >0 for every x>0 ⇒ yes.
/
✅ Conclusion: Both goods are “goods” (not bads).
Hence indifference curves are downward-sloping and convex to the origin (standard shape).
(b) Behavior of MU of y
MUy = ∂u/∂y = 1 (constant)
📈 Result: MU of y neither diminishes nor increases—it is constant.
(c) Marginal Rate of Substitution (MRS)
𝑀𝑈𝑥 1
MRS(x,y) = = = x−1/2
𝑀𝑈𝑦 √𝑥
Check how MRS moves when the consumer trades x for y along an indifference curve
(i.e. as x ↑ and y ↓):
3
1
d/dx(MRS)= d/dx (x −1/2 )=− 𝑥 2 < 0
2
🔍 Interpretation: MRS falls as x rises → Diminishing MRS.
Therefore indifference curves are strictly convex to the origin.
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(d) Graph the Indifference Curve U = 5
Set utility equal to 5:
2√𝑥 + y = 5 ⟹ y = 5 − 2 √𝑥
Domain: x≥0 and y≥0 ⇒ 0≤x≤6.25.
Intercepts:
o Vertical (x = 0): y=5
o Horizontal (y = 0): x=6.25
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Question # 3
Jane receives utility from days spent traveling on vacation domestically (D) and days spent traveling on
vacation in a foreign country (F), as given by the utility function U(D,F) = 10DF. In addition, the price of
a day spent traveling domestically is $100, the price of a day spent traveling in a foreign country is $400,
and Jane’s annual travel budget is $4000. (D and F do not need to be integers.)
(a) Write down the equation of the budget line.
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(b) Write down Jane’s utility maximization problem. Find her utility-maximizing choice of days spent
traveling domestically and days spent in a foreign country using the Lagrange multiplier method
(c) Calculate the marginal utility of D at the optimal basket. Using the marginal utility of D and the
Lagrange multiplier, explain the meaning of the price of D.
Solution
(a). Budget Line Equation:
Pd = 100$
Pf = 400$
I = 4,000$
Here, budget constraint = PdD + PfF ≤ 4,000$
= 100D + 400F ≤ 4,000$
Budget line = 100D + 400F = 4,000 or D + 4F = 400
Graph:
1 4,000
𝑃𝑓
= 400 = 10 (D =0)
1 4,000
= = 40 (F=0)
𝑃𝑐 100
𝑃 100 1
Slope = - 𝑃𝑑 = - 400 = - 4
𝑓
All the combinations under the budget line (shaded
area) are affordable, while any combination above
the budget line is not affordable.
(b). Utility Maximization Problem:
Utility function = U(D,F) = 10DF
Maximization problem = maxD,F 10 D.F s.t. (100D = 400F = 4,000)
Lagrangian Multiplier = Λ (D,F,λ) = 10DF + λ(4,000 – 100D – 400F)
First order condition:
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𝜕Λ
1. = 10F -100λ = 0
𝜕𝐷
10F = 100λ
F = 10λ
𝜕Λ
2. 𝜕𝐹
= 10D - 400λ = 0
10D = 400λ
D = 40λ
𝜕Λ
3. 𝜕λ
= 4000 – 100D – 400F = 0
Substitute D=40λand F=10λinto the budget constraint:
4000 = 100D + 400F
4000 = 100(40λ) + 400(10λ)
4000 = 8000λ
λ = 0.5
Here, λ is the marginal utility of income.
Now,
F = 10λ D = 40λ
F = 10(0.5) D = 40(0.5)
F = 5 Days D = 20 Days
Optimal bundle = (D = 20, F = 5)
Optimal Utility = 10DF
Optimal Utility = 10(20)(5) =1000
(c). Marginal Utility of D at optimum:
Utility function = U(D,F) = 10DF
Taking 1st order derivative w.r.t D
𝜕𝑈
MUd = 𝜕𝐷 = 10F
F=5 so, MUd = 50
It means that if Jane gets 1 additional unit of D (20 increases to 21), keeping F constant, her utility will
increase by 50 units.
Marginal Utility of Income = λ = 0.5
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It means that if income increases by 1$, then utility increases by 0.5 units, so if income increases from
4,000$ to 4,001$, 0.5 units of utility increase.
According to the equal marginal utility principle,
𝑀𝑈𝑑 𝑀𝑈𝑓
= =λ
𝑃𝑑 𝑃𝑓
So,
𝑀𝑈𝑑
𝑃𝑑
=λ
𝑀𝑈𝑑 = λ𝑃𝑑
50 = (0.5)(100)
50 = 50
Interpretation of MUD and λ𝑷𝒅 & meaning of Price:
MUd means the benefit of 1 more unit.
λ𝑃𝑑 means the opportunity cost of 1 more unit of D. The price of D reflects how many dollars
Jane must give up to get one more unit of D, and λ converts that dollar cost into utility terms.
At the optimum, 𝑀𝑈𝑑 = λ𝑃𝑑 , benefit equals cost, meaning Jane cannot increase her utility by
reallocating her budget between domestic and foreign travel.
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