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Econ 201 Microeconomic Theory Problem Set #1 Due March 1

This document outlines 10 practice problems for a microeconomics class. The problems involve drawing indifference curves for different utility functions, deriving demand functions, analyzing substitution and income effects of price changes, and deriving labor supply functions. Example utility functions include quasilinear, Cobb-Douglas, and minimum functions. Students are asked to illustrate preferences, find optimal bundles, and determine how demand responds to price changes for various agents.

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Usman Hussain
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113 views3 pages

Econ 201 Microeconomic Theory Problem Set #1 Due March 1

This document outlines 10 practice problems for a microeconomics class. The problems involve drawing indifference curves for different utility functions, deriving demand functions, analyzing substitution and income effects of price changes, and deriving labor supply functions. Example utility functions include quasilinear, Cobb-Douglas, and minimum functions. Students are asked to illustrate preferences, find optimal bundles, and determine how demand responds to price changes for various agents.

Uploaded by

Usman Hussain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Econ 201

Microeconomic Theory
Problem Set #1
Due March 1

1. Draw the indifference curves for the following individuals


preferences for two goods: hamburgers and beer.

 Al likes beer but hates hamburgers


 Yao eats one hamburger and washes it down with one beer.
She will not consume an additional unit of one beer without
an additional unit of one hamburger and vice versa.
 Santiago hates hamburgers and he hates beer

2. For each of the following utility functions draw indifference curves


for the given utility levels. Use arrows to indicate the direction in
which utility is increasing.

 U(X,Y) = X(Y-1) for u = 4


 U(X,Y) = min ( 2X, 0.5X+0.5Y, Y) u=4,6
 U(X,Y) = min (X, Y2). for u = 9, 16
 U(X,Y) = Y-X2 for u = 1,2

3. The following is an example of a quasilinear utility function.


U(X,Y) = X.5 + Y. where MUX = .5X-.5. MUY = 1.

 This quasilinear utility function has the special property that the
indifference curves are parallel along a vertical line (X on the
horizontal axis). Prove!

4. When comparing any two bundles of food (F) and shelter (S) Am will
always first look at the amount of food. A bundle with more food is.
Always preferred to a bundle with less food regardless of the amount
of shelter in each. If, however, two bundles have equal F then the
one with more S is preferred.
 Illustrate Amy’s preferences.
 Derive her demand function.
5. Prove the following Claim Given the general Utility function
U(X,Y) = min(aX, bY) then the demand function for X will be
(bI/(bPx + aPy) and the demand function for Y will be aI/(bPx +
aPy) where I is income.

6. Suppose Graciela’s utility function is U (X, Y) = X2Y. Her Mux=2XY


and MUy=X2. Graciela’s income is $100 and the price of X is $1 and
the price of Y is $4.
a. Determine Graciela’s optimal bundle of X and Y.
b. Determine the maximum level of utility that she will receive.
c. Suppose the price of X increases to $2. Determine her new optimal
bundle.
d. Compute the substitution and income effects of the price change of X.
e. Derive Graciela’s demand for X equation.

7. Kervens’ utility function is U (X, Y) = min (2x,4y).


a. Illustrate his preferences by drawing several of his indifference curves.
b. What is Kervens’s demand equation for X and his demand equation for
Y?

8. Suppose Yi Chen’s utility function over leisure (l ) and income (Y) is


U(l,Y) is the following: U = l.25+Y.25 Where MUl = .25l -.75 and
MUy = .25Y-.75. Derive Yi Chen’s supply of labor equation.
(Remember her budget line is Y = wL where the slope is w and
L+ l = 24)

9. Olga consumes two goods X and Y. Her utility function is given by


the following expression:

U(X, Y) = 4X.5Y.5 and MUx = 2X-.5 Y.5 MUy = 2X.5Y-.5


The current prices of X and Y are $25 and $50 respectively. Olga has $750 to spend.
a. Calculate the optimal quantities of X and Y that Olga should
choose.
b. Suppose the price of X drops to $15 determine the total effect,
substitution effect, Income effect of the price change. You
must use the Hicksian approach.
c. What is Olga’s demand function for X?
10. Roger’s utility function is U(X,Y) = min(2X,3Y).
 Show some of Roger’s indifference curves
 Show the substitution and income effects of a change in
the price of X.

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