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Microeconomics Assignments

This document contains two assignments on microeconomics concepts. The first asks to solve a utility maximization problem using Lagrange methods to find optimal choice, maximum utility, and budget shares. The second provides a utility function and budget line to find the optimal consumption amounts and shares of apples and bananas for a household with $20 income. Key steps are calculating marginal rates of substitution and setting equal to price ratios to determine optimal bundles that maximize utility subject to the budget constraint.

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Nasri IBRAHIM
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31 views

Microeconomics Assignments

This document contains two assignments on microeconomics concepts. The first asks to solve a utility maximization problem using Lagrange methods to find optimal choice, maximum utility, and budget shares. The second provides a utility function and budget line to find the optimal consumption amounts and shares of apples and bananas for a household with $20 income. Key steps are calculating marginal rates of substitution and setting equal to price ratios to determine optimal bundles that maximize utility subject to the budget constraint.

Uploaded by

Nasri IBRAHIM
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as ODT, PDF, TXT or read online on Scribd
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Assignment on Microeconomics for management

1, Suppose the following utility maximization problem of a consumer. Answer the


following questions by applying the Lagrange Method.
Maximize: U(X, Y) = 5X2Y

Subject to: 10X + 10Y=1000

A) Calculate MRSX,Y and interpret the result.


B) Calculate MRSY,X and interpret the result.
C) Calculate optimal choice of the consumer.
D) Calculate the maximum utility.
E) Calculate the budget share of each commodity at optimum.

2,A household consumes only apples and bananas. We denote a consumption


bundle consisting X bags of apple and Y bags of bananas is denoted by (X, Y). The
preference of the household is given by the utility function U(X, Y) = x 0.8 y If the 0.2

¿
income of the household is 20 $ and the price of apple (X) and banana (Y) is 4 $
and 2, respectively, then
A) Write down the budget line equation
 The budget line equation represents the combination of goods that can be purchased with
a given income. In this case, the income of the household is $20 and the price of apples (X)
and bananas (Y) is $4 and $2 respectively so ,The budget line written as, 4x+2y=20
B) Calculate MRS
M U x


M U y

MRS= 0.8
0.2
x
x
¿
¿ 0.2

0.8
y
y
¿
0.2

0.8

¿
4 y
x

C) Find the optimal consumption of X and Y


 To find the optimal consumption of X and Y, we can equate the marginal rate of
substitution (MRS) to the price ratio. The MRS is the ratio of the marginal utility of X to the
marginal utility of Y.

We have MRS = 4 y Since the price ratio is given as 2, we can set the MRS equal to 2:
x
4 y
x
¿
2

4Y = 2X. Then Y =
T
o
¿ s
o
l
v
e
¿ f
o
r
¿ Y
¿ i
n
¿ t
e
r
m
s
¿ o
f
¿ X
,
¿ w
e
¿ c
a
n
¿ r
e
a
r
r
a
n
g
e
¿ t
h
e
¿ e
q
u
a
t
i
o
n
:

0.5X

Now, let's substitute this value of Y into the budget line equation:
4X + 2(0.5X) = 20
4X + X = 20
5X = 20
X=4
Plugging this value of X back into the equation Y = 0.5X, we find:
Y = 0.5(4) = 2
Therefore, the optimal consumption is X = 4 bags of apples and Y = 2 bags of bananas.
D) Compute the maximum utility
 To compute the maximum utility, we can substitute the optimal consumption values into
the utility function:

U(X, Y) = ¿ 4
¿ 2
0.8

0.2
≈ 3.58

Therefore, the maximum utility is approximately 3.58.


E) Show the equilibrium condition graphically

F) Compute the income share of x and y good
 To compute the income share of X and Y goods, we can calculate the proportion of the
total income spent on each good. The income share of X is given by:

Income share of X = (Price of X * Quantity of X) / Total income


= (4 × 4) / 2 = 0.8

Similarly, the income share of Y is given by:

Income share of Y = (Price of Y * Quantity of Y) / Total income


= (2 * 2) / 20
= 0.2

Therefore, the income share of X is 0.8 or 80% and the income share of Y is 0.2 or 20%.

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