Problem Set - 4
Problem Set - 4
Directions:
1. This assignment is due by 11:59 pm on Wednesday, September 16.
2. Your answers must be submitted through Sakai. You can find “Problem Set #4” under Tests
& Quizzes on Sakai.
4. For each question, select the one best answer. Answer 8 out of 10 questions correctly to pass.
1. Yina’s preferences over goods x and y are represented by 𝑈(𝑥, 𝑦) = 𝑥1/2 + 𝑦 1/2. What is her
demand function for good x? Let px denote the price of x, let py denote the price of y, and let I
denote income.
𝐼
a. 𝑥 = 𝑃𝑦
𝑃𝑥 (1+ )
𝑃𝑥
𝐼
b. 𝑥 = 𝑃
𝑃𝑥 (1+ 𝑥 )
𝑃𝑦
𝐼
c. 𝑥 = 1+𝑃
𝑥
𝐼𝑃
d. 𝑥 = 1+𝑃𝑥
𝑥
(See Besanko 5.6 and 5.8 and Demand and Elasticity Practice Problem #1.)
2. Suppose Jay’s utility function is given by U(x,y) = min(3x,4y). Let px denote the price of x, let py
denote the price of y, and let I denote income. The equation for his demand function for good y is
𝐼
a. 𝑦 = 4
𝑝𝑥 + 𝑝𝑦
3
𝐼
b. 𝑦 = 3
𝑝 + 𝑝𝑦
4 𝑥
𝐼
c. 𝑦 = 4
𝑝𝑥 + 𝑝𝑦
3
𝐼
d. 𝑦 = 3
𝑝𝑥 + 𝑝𝑦
4
(See Besanko 5.7 and Demand and Elasticity Practice Problem #2.)
3. Katie’s utility function is 𝑈(𝑥, 𝑦) = 2ln (𝑥) + 𝑦. What must be true for Katie to be at an interior
solution?
𝐼
a. 𝑃𝑦 < 2
𝑃𝑥
b. 𝑃𝑦 < 2
𝐼
c. 𝑃𝑥 < 𝑃
𝑦
𝑃𝑦
d. 𝑃𝑥 < 2
(See Besanko 5.16 and Demand and Elasticity Practice Problem #3.)
4. Through some fancy Lagrangian techniques, you find an individual’s demand function for good
3 1/2
x to be: 𝑥 = 𝑃 2 − 𝑃𝑦 𝑃𝑥 . Consider the 4 statements (a-d) below. Which of these statements, if
𝑥 𝑃𝑦
(See Besanko 5.6 and 5.16 and Demand and Elasticity Practice Problem #5.)
6. Taylor’s preferences for goods x and y are given by the utility 𝑈(𝑋, 𝑌) = 𝑋1/3 𝑌1/2 . Use
elasticity of demand to predict what will happen to her consumption of good x if the price of
good x decreases by 12%.
a. 0
b. + 4%
c. + 6%
d. + 12%
e. + 24%
7. David has a quasi-linear utility function of the form U(x, y) = √x + y. Which describes his
income consumption curve, assuming an interior solution?
a. upward sloping
b. downward sloping
c. vertical
d. horizontal
e. undefined
𝑃𝑥
c. 𝜀𝑦,𝑥 = − 3𝐼
−𝑃𝑥
2
𝑃
d. 𝜀𝑦,𝑥 = − 3𝑃𝑥
𝑦
9𝑃𝑦 1
e. 𝜀𝑦,𝑥 = (4𝑃 ) 𝐼 9𝑃𝑦
𝑥 ( − )
𝑝𝑦 4𝑃𝑥
(See Besanko 5.4 and Demand and Elasticity Practice Problems #9 and 10.)
10. Consider the truthfulness of the following statement.
(See Besanko 5.4 and Demand and Elasticity Practice Problems #9 and 10.)