EC 203 - INTERMEDIATE MICROECONOMICS

Boğaziçi University
Department of Economics
Summer 2020
Problem Set 1 - Solutions

1. Draw indifferences curves to represent each of the following type of preferences.

(a) Quarters-dollars: A consumer is always happy to change 4 quarters for 1 dollar.

Solution:
quarters

dollars
1 2

(b) Bicycle frames-tires: A consumer always wants 2 tires to go with 1 frame.

Solution:
frames (y)

2y = x

2 2 bikes
1 1 bike
tires (x)
2 4

2. Tom always begins his day with a strawberry milkshake. He makes it by mixing milk (x) with five
strawberries (y). The secret of a really good milkshake lies in the optimal proportion of milk and fruit:
one glass always comes with five strawberries.

(a) Plot Tom’s representative indifference curves. Depict three indifference curves that pass through the
following bundles (5, 1), (10, 10) and (15, 4). What is the MRS at each of these points?
Solution: See the graph below. MRS at each of these bundles is zero.
(b) What utility function represents these preferences? On the graph from (a), indicate the level of
utility corresponding to each indifference curve.
Solution: A utility function that represents these preferences would be u(x, y) = min{5x, y}. The
utility levels would be u(5, 1) = 1, u(10, 10) = 10, and u(15, 4) = 4

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 (c) Multiply your utility function by ten and add two to it. How did the indifference curves change?
How was the level of utility associated with each indifference curve affected?
Solution: We have, v(x, y) = 10 min{5x, y} + 2. Since v is a monotonic transformation of u,
shape of indifference curve and preference rankings will not be affected. But, the numbers utility
levels assigned on each indifference curve will change. We have v(5, 1) = 12, v(10, 10) = 102, and
v(15, 4) = 42.
strawberries (y)

y = 5x

(10,10)
10 2 milkshakes u = 10 v = 102

(15,4)
4 4/5 milkshakes u=4 v = 42

(5,1)
1 1/5 milkshakes u = 1 v = 12

milk (x)
1/5 4/5 2 5 10 15

3. Kate has two favorite kinds of apples: Fuji (x) and Gala (y). Kate loves them both and actually does
not distinguish between the two kinds.

(a) In a graph, show Kate’s indifference that pass through (2, 3) and (3, 3).
Solution:
gala (y)

fuji (x)
2 3 5 6

(b) Suggest two different utility functions that represent Kate’s preferences.
Solution: Here are some examples: u(x, y) = x + y, u(x, y) = (x + y)2 , u(x, y) = 5(x + y),
u(x, y) = x + y + 1000
(c) Find the marginal rate of substitution.
Solution: MRS is negative of the slope of IC which is 1 in this case.

4. Suppose the set of bundles is given by B = {B1 , B2 , B3 , B4 , B5 }. Also suppose that the preferences of
a consumer are given by B1  B2 ∼ B3 and B4  B5 . Can you represent these preferences by a utility

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 function? If you can give a utility function that does so. If not, explain why you cannot. Suppose now
we also have the information B5  B1 : Now, can you represent it with a utility function? If so, provide
one. If not explain.
Solution: No, because the preferences are not complete as we don’t know the preferences between
any of B1 , B2 , B3 and any of B4 , B5 . Once we have the information B5  B1 , now we have complete
preferences. These preferences are also transitive as we have the ranking B4  B5  B1  B2 ∼ B3 .
Since the preferences are both complete and transitive, there exits a utility function that represents these
preferences, for instance, u(B4 ) = 20, u(B5 ) = 15, u(B1 ) = 1, u(B2 ) = 0 and u(B3 ) = 0.

5. Suppose a consumer’s preferences can be represented by the following utility function; u(x, y) = x + y.

(a) Show that the utility function v(x, y) = 10x + 10y represent the same preferences with u, that is, v
and u are monotonic transformations of each other.
Solution: Arbitrarily pick two bundles x = (x1 , x2 ) and y = (y1 , y2 ), and show that both u and
v represent the same preference relation. Assume that x  y, then u(x1 , x2 ) > u(y1 , y2 ), then
x1 + x2 > y1 + y2 , then 10x1 + 10x2 > 10y1 + 10y2 , that is v(x1 , x2 ) > v(y1 , y2 ).
(b) Show that the utility function z(x, y) = x + y 2 does not represent the same preferences with u, that
is, z is not a monotonic transformation of u.
Solution: Consider (1, 1) and (0, 2). According to u, u(1, 1) = 2, u(0, 2) = 2, then (1, 1) ∼ (0, 2).
According to z, z(1, 1) = 2, z(0, 2) = 4, then (1, 1) ≺ (0, 2). So they are not the same preferences,
hence z does not represent the same preferences as u does.

6. Suppose a consumer’s preference relation, % is defined over the points in R2+ and is given as follows:
x % y iff x1 > y1 or [x1 = y1 and x2 ≥ y2 ]. Suppose this is a strongly monotone preference relation. How
do the indifference curves look like? Can you represent this preference relation by a utility function?
Solution: This is known as “lexicographic” preferences. It ranks all of the points on R2+ , but does
so in a way that is impossible to represent using any utility function, and also very difficult to “draw”
indifference curves for. All points with more of good 1 are preferred to all points with less of good one,
so on the graph we have the rule “the further to the right, the better”. This alone, if the consumer did
not care at all about good 2, would be easy. We could just write u (x1 , x2 ) = x1 , and indifference curves
would be linear and completely vertical. However, the consumer uses the amount of good 2 as a sort of
tiebreaker when two bundles have exactly the same amount of good 1. Therefore, the vertical indifference
curves are not indifference curves at all! The higher we move on one, the more preferred the bundle. So
every single point on R2+ is its own indifference “curve”–the consumer is not actually indifferent between
any two points. The order of the indifference “curves” (or, more accurately, points) is starting with the
origin, going all the way straight up to infinity(!), then back to zero slightly (how slightly?) to the right
and straight up to infinity again, and so on. You can see that it would be impossible to come up with
a utility function (a real number for every bundle) that respects this ranking. It can also be proven
mathematically that representing this type of preferences as a utility function u : R2+ → R is simply
impossible.

7. Jonas’s utility function is uJ (x, y) = xy. Martha’s utility function is uM (x, y) = 1000xy. Noah’s utility
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function is uN (x, y) = −xy. Ulrich’s utility function is uU (x, y) = −(xy+1) . Egon’s utility function

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 is uE (x, y) = xy − 10, 000. Claudia’s utility function is uC (x, y) = x − y. Helge’s utility function is
uH (x, y) = x (y + 1). Which of these people have the same preferences as Jonas?
Solution: We must check which of the utility functions (uM , uN , uU , uE , uC , uH ) are positive monotonic
transformations of uJ . We find that

uM (x, y) = 1000xy = 1000uJ (x, y)

increases as uJ increases,
1 1
uU (x, y) = =
− (xy + 1) −uJ (x, y) − 1
increases as uJ increases, and

uE (x, y) = xy − 10, 000 = uJ (x, y) − 10, 000

increases as uJ increases, and so Martha, Ulrich and Egon all have the same preferences as Jonas. On
the other hand, uN (x, y) = −xy = −uJ (x, y) is a negative monotonic transformation of uJ , so Noah has
the exact opposite preferences as Jonas, while uC and uH cannot be written as transformations of uJ at
all, and so neither Claudia nor Helge share Jonas’s preferences.

8. For each of the following utility functions, find the marginal utilities (M Ux and M Uy ) and the marginal
rate of substitution between x and y, M RSxy , and explain whether M RSxy is diminishing or not.

(a) u(x, y) = 3x + y
Solution: M Ux = 3, M Uy = 1, M RSxy = 3, constant
(b) u(x, y) = x1/2 y
1y
Solution: M Ux = 21 x−1/2 y, M Uy = x1/2 , M RSxy = 2 x, diminishing
(c) u(x, y) = x1/3 y 2/3
1y
Solution: M Ux = 31 x−2/3 y 2/3 , M Uy = 2/3x1/3 y −1/3 , M RSxy = 2 x, diminishing
(d) u(x, y) = x2 + 3y − 2
2x
Solution: M Ux = 2x, M Uy = 3, M RSxy = 3 , increasing
(e) u(x, y) = x1/2 + y
Solution: M Ux = 21 x−1/2 , M Uy = 1, M RSxy = 21 x−1/2 , diminishing
(f) u(x, y) = (x + 2y)2
Solution: M Ux = 2(x + 2y), M Uy = 4(x + 2y), M RSxy = 1/2, constant
xy
(g) u(x, y) = x+y
2 y2
y x2
Solution: M Ux = (x+y) 2 , M Uy = (x+y)2
, M RSxy = x2
, diminishing
p
(h) u(x, y) = x2 + y 2
Solution: M Ux = 21 (x2 + y 2 )−1/2 2x, M Uy = 12 (x2 + y 2 )−1/2 2y, M RSxy = xy , increasing

9. Consider the following utility functions:

u(x, y) = xy

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 u(x, y) = x2 y 2
u(x, y) = lnx + lny
Show that all three utility functions have the same marginal rate of substitution, M RSxy . Is this a
coincidence? Why, why not?
Solution: All the three utility functions have the same M RSxy , since all utility functions are monotonic
transformation of each other.
For u(x, y) = xy, M Ux = y, M Uy = x, M RSxy = xy .
For u(x, y) = x2 y 2 , M Ux = 2xy 2 , M Uy = 2x2 y, M RSxy = xy .
For u(x, y) = ln x + ln y, M Ux = x1 , M Uy = y1 , M RSxy = xy .

10. Suppose that the consumer’s utility function is as u(x, y) = x + xy

(a) Find the equation for indifference curves where u = 40. Sketch the indifference curve.
40
Solution: Let 40 = x + xy, there is y = x −1

u = 40
40
x

(b) Find M RSxy by using the equation found in part (a).

dy 40
Solution: MRS is negative of the slope of the IC. M RSxy = − dx = x2
(c) Calculate marginal utilities.
Solution: M Ux = 1 + y and M Uy = x.
(d) Find M RSxy by marginal utilities from part (c).
y+1
Solution: M RSxy = x
(e) Show that M RSxy found in part (b) and (d) are the same.
40
Solution: Using the equation of the IC with u = 40, we get 1 + y = x. Replace y + 1 in the
y+1
expression that we found in part (d) with 40/x, M RSxy = x = 40/x2 , which is the result that we
found in part (b).

11. Al derives utility from three goods: music (m) , wine (w) and cheese (c). His utility function is of the
simple linear form u(m, w, c) = m + 2w + 3c.

(a) Assuming Al’s consumption of music is fixed at 10, determine the equations for the indifference
curves for w and c where u = 40 and u = 70. Sketch these curves.

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 Solution: For u = 40, there is c = 10 − 23 w. For u = 70, there is c = 20 − 32 w

c
20

10
-2/3
-2/3

u = 70
u = 40 w
15 30

(b) Show that Al’s MRS of wine for cheese is constant for all values of w and c on the indifference curves
calculated in part (a).
ū−10
Solution: Let u = ū, we have c = 3 − 23 w, then M RS = − dw
dc
= 2
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(c) Suppose Al’s consumption of music increases to 20. How would this change your answers in part (a)
and (b)? Explain it intuitively.
Solution: If the consumption of music increases to 20, it lifts the linear indifference curve inward
toward the origin. The wine intercept is reduced by 5 units for both indifference curves. This is
because we need less wine and cheese to achieve the same utility levels. Slopes of ICs will not be
affected since the rate of substitution of wine for cheese will not be affected by an increase in music
consumption.

A Note on the sign of MRS

We have two goods, x and y, where we put x on the horizontal and y on the vertical. Assume both goods
are goods and thus indifference curves are downward sloping.
As we know from our lectures, M RSxy is defined to be the change in y relative to an incremental change in
x, staying on the same indifference curve. Thus, it is also the slope of the indifference curve. Since indifference
curves are downward sloping when both goods are goods, MRS is a negative value (to be precise, it is a function,
but when calculated at a certain bundle, (x, y), we get its value, and it is negative since IC is downward sloping.).
However, what’s important is its absolute value, that is, its magnitude. The negative sign only indicates
that these two goods are both goods (to get more of one of the goods, the consumer needs to give up some of
the other). The magnitude is the one that tells us the rate at which these two goods are substituted, and we
want to check whether that magnitude diminishes or not.
When we check whether MRS is diminishing or not, we look at its absolute value and check
if it is decreasing or not when you increase x and decrease y.
That’s why in the solutions for the problem sets, we looked at the absolute value of it and checked if that’s
1y
diminishing or not, when x increases and y decreases. For example, if u(x, y) = x1/2 y, then |M RSxy | = 2 x,
and it is diminishing when x goes up and y goes down.