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Practice Problems 2

This document contains practice problems from a microeconomics course at the National University of Singapore. It includes 3 questions about consumer choice and utility maximization given budget constraints. Question 1 involves a consumer choosing between domestic and foreign vacation days. Question 2 involves a consumer choosing between meat and potatoes given their prices and the consumer's utility function and budget. Question 3 asks about inferring preferences of a consumer from their optimal choices given different budget lines.

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199 views

Practice Problems 2

This document contains practice problems from a microeconomics course at the National University of Singapore. It includes 3 questions about consumer choice and utility maximization given budget constraints. Question 1 involves a consumer choosing between domestic and foreign vacation days. Question 2 involves a consumer choosing between meat and potatoes given their prices and the consumer's utility function and budget. Question 3 asks about inferring preferences of a consumer from their optimal choices given different budget lines.

Uploaded by

pjc06s16
Copyright
© Attribution Non-Commercial (BY-NC)
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Download as PDF, TXT or read online on Scribd
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National University of Singapore Department of Economics

EC2101 Microeconomic Analysis I Semester 1 AY 2012/2013

Practice Problems 2 Consumer Choice


Question 1 (P&R 3.15) 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 Janes 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. b) Graph Janes budget line on the same graph. c) Can Jane afford any of the bundles that give her a utility of 800? What about a utility of 1200? d) Find Janes utility maximizing choice of days spent traveling domestically and days spent in a foreign country. Question 2 (P&R 3.14) Connie has a monthly income of $200 that she allocates among two goods: meat and potatoes. a) Suppose meat costs $4 per pound and potatoes $2 per pound. Draw her budget line. b) Suppose also that her utility function is given by the equation U(M, P) = 2M + P. What combination of meat and potatoes should she buy to maximize her utility? (Hint: Meat and potatoes are perfect substitutes.) c) Connies supermarket has a special promotion. If she buys 20 pounds of potatoes (at $2 per pound), she gets the next 10 pounds for free. This offer applies only to the first 20 pounds she buys. All potatoes in excess of the first 20 pounds (excluding bonus potatoes) are still $2 per pound. Draw her budget line. d) An outbreak of potato rot raises the price of potatoes to $4 per pound. The supermarket ends its promotion. What does her budget line look like now? What combination of meat and potatoes maximizes her utility? Question 3 As shown in the following figure, a consumer buys two goods, food and housing, and likes both goods. Assume the consumers preference satisfy the three assumptions (completeness, transitivity, and more is better). When she has budget line BL1, her optimal choice is basket A. Given budget line BL2, she chooses basket B, and with BL3, she chooses basket C.

National University of Singapore Department of Economics

EC2101 Microeconomic Analysis I Semester 1 AY 2012/2013

a) What can you infer about how the consumer ranks baskets A, B, and C? If you can infer a ranking, explain how. If you cannot infer a ranking, explain why not. b) On the graph, shade in the areas that are revealed to be less preferred to basket B. c) On the graph, shade in the areas that are revealed to be (more) preferred to basket B.

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