ECON 212

Chapter 6 Practice Questions

Fall 2024

1. Noah has a linear utility function u(x, y) = ax + y, where a > 0. His budget equation over the
two goods x and y is given by x + py = m, where p is the price of y, m is his income.

(a) Find out Noah’s demand functions x(p, m) and y(p, m).

(b) On a graph, draw his demand curve for good y.

2. Olivia’s preferences over watermelon and other fruits are represented by the utility function
u(w, o) = w + b ln o, where w is the amount of watermelon she consumes, o is the amount of other
fruits she consumes, and b is some positive number. The price of watermelon is pw and the price of
other fruits is po . Olivia has an income of m.

(a) Find out her demand function for watermelon w(pw , po , m) and her demand function for other
fruits o(pw , po , m).

(b) On a graph, draw Olivia’s Engel curve for watermelon. On the same graph, draw her Engel
curve for other fruits. Use the vertical axis to denote income and the horizontal axis to denote
quantity of watermelon/other fruits.

3. Parker has preferences over Coke and Pepsi that can be represented by u(xa , xb ) = (xa +c)(xb +d),
where xa is the amount of Coke, xb is the amount of Pepsi, and c and d are some positive constants.
Let pa be the price of Coke and pb be the price of Pepsi. Let m be his income.

(a*) Solve for Parker’s demand functions xa (pa , pb , m) and xb (pa , pb , m).

(b) Write down his inverse demand function for Coke pa (xa ). (For this part, consider only the
interior solution.)

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(c) For Parker, is Coke a substitute for Pepsi or a complement? Explain. (For this part, consider
only the interior solution.)

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 ECON 212
Chapter 6 Practice Questions
Solutions

Fall 2024

可
1.
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(a) Since Noah’s utility function is linear, we need to discuss the relationship between the slope of
the budget line and the slope of the indi↵erence curves. The slope of the budget line is 1/p, and
the slope of the IC is a. So, we have 3 cases:
(i) When 1/p > a, i.e. p < 1/a, the budget line is steeper. Then, x⇤ = 0 and y ⇤ = m/p.
(ii) When 1/p = a, i.e. p = 1/a, the slopes are equal. Then, x⇤ + py ⇤ = m.
(iii) When 1/p < a, i.e. p > 1/a, the IC is steeper. Then, x⇤ = m and y ⇤ = 0.

产品
Combine the 3 cases, we can get the following demand functions:
8
>
> 0 if p < 1/a
<
x(p, m) = [0, m] if p = 1/a (1)
>
>
:
m if p > 1/a
8
>
> m/p if p < 1/a
<
y(p, m) = [0, m/p] if p = 1/a (2)
>
>
:
0 if p > 1/a

(b) The demand curve for y is shown in Figure 1.

1
 Figure 1: Noah’s Demand Curve for Good y

1
a

m y
p

2.

(a) Olivia’s optimization problem is given by

w,o
世
max w + b ln o s.t. pw w + p o o = m

Set up the Lagrangian:

L = w + b ln o (pw w + po o m).
ii ⽂
Take the FOCs:

@L
=1 pw = 0 (3)

意
@w
@L
= b/o po = 0 (4)
@o
@L
= p w w + po o m = 0 (5)
@
1 Puwtbpw m b
Use (3) to get
Dun 0w
= 1/pw . Substitute this into (4) and get o = bpw /po . Then, use (5) to solve for w
m m
and get w = pw b. Note that this only holds when pw > b because w cannot be negative. So, if
m ⇤ ⇤
pw  b, we have w = 0 and o = m/po . Therefore, Olivia’s demand functions can be written as
the following 8 m m
>
< b if >b
pw pw
w(pw , po , m) = m (6)
>
:0 if b
pw
8 bp m
> w
< if >b
po pw
o(pw , po , m) = (7)
:m
>
if
m
b
po pw

2
(b) Olivia’s Engel curves are shown in Figure 2. The red curve is for watermelon. The blue curve
is for other fruits.

Figure 2: Olivia’s Engel Curves

income

bpw

bpw quantity
po

3.

(a) Parker’s optimization problem is given by

max (xa + c)(xb + d) s.t. pa xa + pb xb = m.

xa ,xb

Set up the Lagrangian:

L = (xa + c)(xb + d) (pa xa + pb xb m).

Take the FOCs:

@L
= xb + d pa = 0 (8)
@xa
@L
= xa + c pb = 0 (9)
@xb
@L
= pa x a + pb x b m = 0 (10)
@

From (8), we get = (xb + d)/pa . Substitute this into (9) and get xa = pb (xb + d)/pa c. Then,
m+cpa dpb
substitute this into (10) and solve for xb to get xb = 2pb . (Note that this only holds when
m + cpa dpb > 0; if m + cpa dpb  0, we have a corner solution for xb .) Then, use this to solve for
m cpa +dpb
xa and get xa = 2pa . (Note that this only holds when m cpa +dpb > 0; if m cpa +dpb  0,
we have a corner solution for xa .)

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So, there are three possible cases:

m
• (I) cpa dpb m =) x⇤a = 0, x⇤b > 0 (Parker spends all his money on Pepsi: xb = pb ).

m
• (II) cpa dpb  m =) x⇤a > 0, x⇤b = 0 (Parker spends all his money on Coke: xa = pa ).

• (III) m < cpa dpb < m =) x⇤a > 0, x⇤b > 0 (interior solution: consumption of both Coke
and Pepsi).

Therefore, Parker’s demand functions are given by

8
>
> 0 if cpa dpb m
>
>
>
<m cpa + dpb
xa (pa , pb , m) = if |cpa dpb | < m (11)
> 2pa
>
>
>
> m
: if cpa dpb  m
pa
8m
>
> if cpa dpb m
>
> p
>
< b
xb (pa , pb , m) = m + cpa dpb
if |cpa dpb | < m (12)
>
> 2pb
>
>
>
:0 if cpa dpb  m

m cpa +dpb m+dpb

(b) When |cpa dpb | < m, his demand for Coke is xa = 2pa . Rearrange and get pa = 2xa +c .
Therefore, his inverse demand function for Coke is

m + dpb
pa (xa ) = .
2xa + c

m cpa +dpb
(c) Since xa = 2pa , take the derivative w.r.t. pb and get

@xa d
= > 0.
@pb 2pa

Therefore, for Parker, Coke is a substitute for Pepsi.