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Microeconomics Problem Set Solutions

The document outlines Problem Set 2 for a Microeconomics course, including exercises related to utility functions, consumption, and free time. It presents various scenarios for an individual’s work hours, wage, and utility levels, as well as a case study involving a student named Manuel and his opportunity costs related to attending a master's program versus accepting a job offer. Students are required to graphically analyze and solve these economic problems based on the given information.

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4 views1 page

Microeconomics Problem Set Solutions

The document outlines Problem Set 2 for a Microeconomics course, including exercises related to utility functions, consumption, and free time. It presents various scenarios for an individual’s work hours, wage, and utility levels, as well as a case study involving a student named Manuel and his opportunity costs related to attending a master's program versus accepting a job offer. Students are required to graphically analyze and solve these economic problems based on the given information.

Uploaded by

L PA
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

Problem Set 2

Economics I (Microeconomics)

uc3m

1. Solve Exercise 3.4 in the book

2. Assume an individual has a utility function over consumption y and free time t
with the form: U (y, t) = yt. This person works for a given wage per hour and
uses all her wages to pay for her consumption. The maximum hours a day she can
work is 24.

(a) How much consumption y does the individual need to get utility 12 if she
has 2, 3, 4, 6 hours of free time (make a two-column list that depicts all these
combinations, then draw them in a y − t diagram)?
(b) Sketch the indifference curve at utility level 24 and 6 (no need to do the table
again)?
(c) How would you determine the marginal rate of substitution between con-
sumption and free time graphically?
(d) Assume the individual works 16-t and earns a wage of 1 for each hour worked.
The price of consuming y is 4. How much would the individual work? (De-
termine this graphically)
(e) Suppose there is a law that prohibits any work longer than 10 hours. Do you
think our individual likes that law?
(f) Graphically, how would an increase in the wage change the picture?

3. Solve Exercise 3.11 in the book

4. Manuel has been admitted to uc3m to do a master that lasts eight months, which
costs 600 Euros. The books and the other material he needs to buy cost 200
Euros. Total commuting costs are 150 Euros. He will be living in a hotel that
gives him room and board during the eight months for 6000 Euros. On the other
hand, he will get a 150 Euros scholarship per month. Just before enrolling in the
master, Manuel received a job offer from Zara with a salary of 1000 Euros per
month. Unfortunately, he cannot work and study at the same time. If Manuel
accepts the job, he won’t incur in the commuting expenses but he still will have to
pay the same costs for room and board. Manuel, who studied Economics, knows
that before accepting the job offer he should be computing the opportunity cost of
attending the course at the university. What is this opportunity cost for Manuel?

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