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114 views10 pages

Problemset 3

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10622006
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MICROECONOMICS 1 - OMIK WINTER SEMESTER 2023/2024

EXERCISE SHEET 3

1. Maurice has the following utility function: U(X, Y) = 20X + 80Y − X²- 2Y2, where X is his
consumption of CDs, with a price of $1, and Y is his consumption of movie videos, with a rental
price of $2. He plans to spend $41 on both forms of entertainment. Determine the number of
CDs and video rentals that will maximize Maurice’s utility.

2. Show that the two utility functions given below generate identical demand functions for
goods X and Y:
a. U(X, Y) = log(X) + log(Y)

b. U(X, Y) = (XY)0.5
c. U = xayb

d. U = aln(X) + bln(Y)
e. U = alog(X) + (1 - a)log(Y)

f. U(x1 , x2 ) = ln(x1 + 2) + 2ln(x2 + 2)


g. Find the demanded bundle for a consumer whose utility function is U(x1 , x2 ) = x13/2 x2 and
her budget constraint is 3x1 + 4x2 = 100.

h. Use the utility function U(x1, x2) = x11/2x2 1/3 and the budget constraint I= p1x1 + p2x2 to
calculate x(p, m).

3. The utility function is u = x0,5y0,5. Income is 10,000,000 VND, the price of good X is
10,000 VND and of good Y 20,000 VND. How many units of good X will the household
demand?
4. Heribert B. is an enthusiastic football manager. He wants to spend his entire saving of 12
million euro per year on strikers (xs) and defenders (xv). His utility function is:

a. How many defenders and strikers will Heribert buy per year?

b. A Bava sausage factory surprisingly invests its deposits. Due to big demand for strikers,
their price has risen to $4. How does Heribert;s choice change in this case? Show this in
graph

5. A consumer has the utility function U(x1 ,x2 ) = x1ax21−a , 𝛼 ∈ (0,1).

The income of the consumer is denoted by I, the prices of the two goods are p1 > 0 and p2 > 0.
Sketch the indifference curve and solve the following exercise graphically and mathematically.

a. What is the demand for goods 1 and 2?


b. Assume the price of good 1 decreases from p to p′. What is the demand for both goods now?

c. How high would the corresponding income I′ have be at minimum for a consumer in order to
be able to afford the original bundles of goods? Also draw a graph.

d. Assume the consumer actually had the income I′. Which quantities of both goods would the
consumer like to consume in optimum?
e. How does the demand change if the income now increases from I to I′′?

6. Sharon has the following utility function: U(X,Y) = √ X + √ Y ,where X is her consumption of
candy bars, with price PX = $1, and Y is her consumption of espressos, with PY = $3.

a. Derive Sharon’s demand for candy bars and espresso.


b. Assume that her income I = $100. How many candy bars and how many espressos will Sharon
consume?

c. What is the marginal utility of income?

7. Jane receives utility from days spent traveling on vacation domestically (D) and days spent
traveling on vacation in a foreign country (F), as given by the utility function U(D,F) = 10DF. In
addition, the price of a day spent traveling domestically is $100, the price of a day spent
traveling in a foreign country is $400, and Jane’s annual travel budget is $4000.

a. Illustrate the indifference curve associated with a utility of 800 and the indifference curve
associated with a utility of 1200 and her budget constraint.
b. Can Jane afford any of the bundles that give her a utility of 800? What about a utility of 1200?

c. Find Jane’s utility-maximizing choice of days spent traveling domestically and days spent in a
foreign country.

8. Julio receives utility from consuming food (F) and clothing (C) as given by the utility function
U(F, C) = FC. In addition, the price of food is $2 per unit, the price of clothing is $10 per unit,
and Julio’s weekly income is $50.

a. What is Julio’s marginal rate of substitution of food for clothing when utility is maximized?
Explain.
b. Suppose instead that Julio is consuming a bundle with more food and less clothing than his
utility-maximizing bundle. Would his marginal rate of substitution of food for clothing be greater
than or less than your answer in part a? Explain.

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