Assignment 1

1. Consider a consumer whose utility 3. Consider a consumer whose utility

function is given by U(x,y), his income is function is U(x,y)= -|x-5|-|y-5| and Px=1
M, price of x is denoted by Px and price of and Py=2. Solve the consumer’s problem:
y is denoted by Py max(x,y)≥0 U(x,y) subject to Pxx + Pyy ≤ M
i. U(x,y)= xa yb for income levels 4, 10, 20.
ii. U(x,y)= min{ax,by} 4. Indifference curves are downward
iii. U(x,y)= max{ax,by} sloping because
iv. U(x,y)= ax+by a) Prices are positive
v. U(x,y)= min{x+2y,2x+y} b) Both goods have positive MU
vi. U(x,y)= x+2y0.5 c) MRS is diminishing
vii. U(x,y)= x+log(y), y>0 d) All of the above
viii. U(x,y)= max{x,y}+min{x,y} 5. A consumer has a utility function U(x,y)=
ix. U(x,y)= x2+y2 max{2x+y,x+3y}. He consumes (1,0) in
x. U(x,y)= √𝒙 + √𝒚 equilibrium. Then which of the following
must be true?
Draw Indifference curves in each case and
a) Px ≤ Py
solve the consumer’s problem.
b) Px ≤ (3/2) Py
2. Suppose that a typical graduate student c) Px ≤ (2/3) Py
at the Delhi school of economics lives in a d) Px = Py
two good world, books(x) and movies(y), 6. A consumer has a utility function of the
with utility function U(x,y)=x1/5y4/5. Prices form U(x,y)= u(x) + y, good x is a discrete
of books and movies are 50 and 10 good; the only possible level of
respectively. Suppose the university is consumptions of good x are x=0 and x=1.
considering the following schemes: For convenience assume that u(0)=0. Also
assume that Px ≤ M. Consumer will
Scheme 1: 750 is paid as fellowship and
definitely choose x=1 if Px is strictly less
additional 250 as book grant. Naturally, book
than what?
grant can only be spent on books.
a) Py
Scheme 2: 1000 as scholarship and gets one b) u(1)
movie free on each book they purchase. c) Py u(1)
d) 1
Believing that books and movies are perfectly
7. Consider a consumer with the utility
divisible, compute the optimal consumption
function U(x,y)= x1/2+y. Which one of the
bundle under each scheme.
following is true:
i. Optimal consumption bundle under a. Income elasticity of both goods x
scheme 1 is and y is 1.
a) (4 books, 80 movies) b. Income elasticity of good x is 0.
b) (5 books, 75 movies) c. Income elasticity of good y is 0.
c) (6.5 books, 57.5 movies) d. Income elasticity of good x is 1.
d) (10 books, 50 movies) and that of good y is 0.
ii. Optimal consumption bundle under 8. Consider a consumer having
scheme 2 is lexicographic preferences: x is preferred
a. (4 books, 80 movies) to y if either “x1>y1” or “x1=y1 and x2≥y2”.
b. (4 books, 84 movies) Solve the consumer’s problem and find
c. (5 books, 75 movies) his demand for good 1 and good 2.
d. (5 books, 80 movies)
Ravit Thukral Email id: Thukral.ravit@gmail.com
Assignment 1
9. The last digit of (2137)754 is 13. Mr. B thinks cheese is addictive- the
a. 1 more you eat, the more you want.
b. 3 Suppose x denotes the quantity of
c. 7 cheese. Mr. B’s utility function can be
d. 9 represented by
10. A worker suffers a 20% cut in wages. He a. U(x,y)= x2+y
regains his original pay by obtaining a b. U(x,y)= ln(x) + ln(y)
rise of c. U(x,y)= x+y
a. 20% d. U(x,y)= min{x,y}
𝟏 14. A consumer has utility function
b. 22𝟐%
c. 25% u(x,y)=min{2x1+x2,x1+2x2}. Her income is
𝟏 y=100, the prices are p1=20 and p2=30.
d. 27𝟐%
The amount of x1 in the utility
11. Consider a graph on which one good y is maximising bundle is
on the vertical axis and the only other a. 7 c. 5
good x is on the horizontal axis. On this b. 2 d. 0
graph the income-consumption curve has 15. Consider the same utility function and
a positive slope for low incomes, then it income as above, but suppose the prices
takes a zero slope for a higher income, are p1=10 and p2=30. Then the amount of
and then it takes a negative slope for x1 in the utility maximising bundle is
even higher incomes (the curve looks like a. 10 c. 2.5
an arc, first rising and then falling as b. 2 d. 0
income increases). This curve illustrates 16. A consumer spends Rs. 100 on only two
that, for all income levels, goods, A and B. Assume non-satiation,
a. Both x and y are normal i.e., more of any good is preferred to less.
b. Only y is normal Suppose the price of B is fixed at Rs. 20.
c. Both x and y are inferior When the price of A is Rs. 10, the
d. Only x is normal consumer buys 3 units of B. When the
12. Utility function of a consumer over three price of A is Rs. 20, she buys 5 units of A.
goods x, y and z as U= y min{x,z}. Prices from this we can conclude that for the
of the all three goods are the same in the relevant price range
market. Three discount deals are a. A is inferior good
available, which are as follows: b. B is complement of A
Deal 1: Get 1 unit of z free when you buy c. A is a Giffen good
1 unit of good x. d. All of the above
Deal 2: Get 1 unit of z free when you buy 17. The utility function (x+y)1/2, for
1 unit of good y (x,y)≥(0,0), exhibits
𝟏 𝟏
Deal 3: Get 𝟐 unit of x and 𝟐 unit of z free a. Diminishing MRS and diminishing MUs
b. Increasing MRS and diminishing MUs
when you buy 1 unit of good y.
c. Constant MRS and diminishing MUs
Which of these deals should the d. Increasing MRS and constant MUs
consumer choose? 18. The elasticity of substitution of the
(a) Deal 1 (b) deal 2 production function f(x,y)= cxayb is
(c) Deal 3 (d) all three are equally good a. c/ab c. a+b
b. ab/c d. 1

Ravit Thukral Email id: Thukral.ravit@gmail.com