3.1, 3.2, 3.5, 3.8, 3.9, 3.10, 3.12, Extra Question.

Document Preview: U=1 U=2 U=3 U=4
X Y MRS X...

Question

3.1, 3.2, 3.5, 3.8, 3.9, 3.10, 3.12, Extra Question.
	
Document Preview: U=1 U=2 U=3 U=4
X Y MRS X Y MRS X Y MRS X Y MRS
1:00 1:00 1:00 1:00 4:00 4:00 1:00 9:00 9:00 1:00 16:00 16:00
2:00 0:50 0:25 2:00 2:00 1:00 2:00 4:50 2:25 2:00 8:00 4:00
3:00 0:33 0:11 3:00 1:33 0:44 3:00 3:00 1:00 3:00 5:33 1:78
4:00 0:25 0:06 4:00 1:00 0:25 4:00 2:25 0:56 4:00 4:00 1:00
5:00 0:20 0:04 5:00 0:80 0:16 5:00 1:80 0:36 5:00 3:20 0:64
6:00 0:17 0:03 6:00 0:67 0:11 6:00 1:50 0:25 6:00 2:67 0:44
7:00 0:14 0:02 7:00 0:57 0:08 7:00 1:29 0:18 7:00 2:29 0:33
8:00 0:13 0:02 8:00 0:50 0:06 8:00 1:13 0:14 8:00 2:00 0:25
Extra Homework Question
Use the table to answer the following questions. The table contains marginal rates of substi-
tutions at dierent quantities of two goods for dierent levels of utility (i.e. this is a table of
p
indierence curves). The table uses the utility function U = XY which yields indierence
2
U
0
curves of the form Y = .
X
1. Assume the consumer purchases two goods, x and y, where P =8, P =8, and M=32.
x y
Graph the budget constraint with y on the vertical axis.
2. What is the utility maximizing bundle of x and y? What is the consumer's utility?
Add a representative convex indierence curve showing this utility maximizing bundle.
3. IfP increases to 32, all else equal, what is the new utility maximizing bundle? What is
y
the new level of utility? Add the new budget constraint and utility maximizing bundle
to the graph in part 2.
4. Disaggregate the total change in x and y into the income and substitution eects.
5. At the new price level, P =32 and P =8, what happens if income quadruples to
y x
M =128? Add the new budget constraint and utility maximizing bundle to the graph
in part 3.
1

David · Accepted Answer

3.1
composite good
10
90
 seeds
amount spent on seeds
10*2 =20
money left=100 -20 =80
amount purchased at $1= 80/1 =80, so that total seeds = 10+80=90
3.2
composite good
10                 30 
seeds
amount spent on seeds
10*2 =20
money left=100 -20 =80
amount purchased at $4= 80/4 =20, so that total seeds = 10+20=30
3.5
the constraint is 2.5M +C= 150
M
60
150
C
Opportunity cost of 1C = 2.5M
3.8
These are perfect complements so that indifference curves will be L shaped.
                 bindings(B)
1    2
S(skis)
                  bindings(B)
1
2
S(skis)
3.

3.1, 3.2, 3.5, 3.8, 3.9, 3.10, 3.12, Extra Question. Document Preview: U=1 U=2 U=3 U=4 X Y MRS X Y MRS X Y MRS X Y MRS 1:00 1:00 1:00 1:00 4:00 4:00 1:00 9:00 9:00 1:00 16:00 16:00 2:00 0:50 0:25 2:00...

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