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MIKRO:
1. The decision to consume made in a period of utilty will affect the level in the next
period. this approach is also used by Stigler and Becker as well as by Murphy to
explain why individuals develop a "taste" of the golf course and the opera.
Mathematically. decision refe
ed utility can be expressed as follows:
Utility = Ut {Xt, Yt, St} ............... .. (1}
Where:
∞
St = Σ X t-1 …….. (2)
i=1
I. You are asked to describe the mathematical relationship above and declare
any variable represented by each symbol on top.
Since consumption occurs over time, the decision made in one period can affect the utility in
subsequent periods. For example the addiction on cigarettes where past consumption tends o
increase the present consumption. Habits are formed based on the previous consumption. One
way to portray these ideas mathematically is to assume utility depends on the period t as well as
total of all previous consumption
Utility= Ut( xt, yt, st)
where St= ∑

Actually it is difficult to get the data for all past level of consumption. Thus the utility function
can be modeled using only data of cu
ent consumption and on the consumption of previous
period ( xt-1). The most common way to proceed is to assume that utility is given by
U= Ut( x*t, yt)
where x*t= xt-xt-1
The function implies that higher xt-1 , more xt will be chosen in the cu
ent p[eriod, if all other
things remain the same.
II. The utility function on {1} {do not include the element of time} turned out to have a value of:
Utility = U (X, Y, S) = X + 2Y + 3S, …….(1a)
a) Assuming, the consumption of X is fixed 10, determine the equation of the
indifference curve for Y and 5 if U = 40 and U = 70 Draw the curve.
) If the MRS Y to S constant for all value Y and S, Please calculation of the
equation indifference curve on {a}.
We can denote the equation as u* = 2Y + 3S
3S=U*-2Y
S=(1/3) U*- (2/3)Y
MRS(Y,S)= 2/3
MRS is constant for all values of Y and S
c) If the consumption of X increases to 20, whether there is a change answers
you to question (a) and (b). Explain using your reasoning.
0
5
10
15
20
25
0 5 10 15 20 25 30 35
S
Y
Indifference Curve
Series1
When U=70

If the consumption of X increases to 20, the value of MRS will not change. It will remain as
constant as 2/3.
Any change in x will only lead to change the level of utility but not the MRS.
======================================================
1. Mr. A consumption of goods X and Y where his utility function is:
U (X, Y) = √X + Y
The price of each item is Px = Py = Rp 3,000 and Rp 4,000 and Rp 50,000 budget
You are asked to explain how Mr. A is based on the price of each item and budgets to
achieve the satisfaction maksimumi U2 and whether the level of satisfaction of the
conditions of U2 is better than the condition U2 (explain using curves indifference and
do not forget to claim anyway tangency of your calculations)
2. Explain the concept of rectum to scale in detail!
Law of returns to scale explains the proportional change in output with respect to proportional
change in inputs. Economic theory suggests three types of returns to scale:
1. Increasing returns to scale: If the proportional change in output is greater than the
proportional change in inputs, it is called increasing returns to scale. For example if the
inputs are doubled but the output increases more than doubled, it is...