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Week 2 Homework - Prepare For Workshop Discussion in Week 3

Microecon homeworks

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belason94
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10 views

Week 2 Homework - Prepare For Workshop Discussion in Week 3

Microecon homeworks

Uploaded by

belason94
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Tutorial week 3

1. Assume conventionally shaped indifference curves. Last week, Susan bought cheese for
$4 a pound and meat for $5 a pound. This week, the price of cheese has risen to $6 a
pound while the price of meat has dropped to $2 per pound. Her income is always $22
per week. This week she buys 3 pounds of cheese and 2 pounds of meat. In which week
is she happier? Explain your answer and also illustrate with a diagram.

2. Assume conventionally shaped indifference curves. Suppose the only goods you buy
are circus tickets and accounting textbooks. One day, the price of circus tickets goes up,
the price of accounting textbooks goes down, and you notice that you are exactly as
happy as you were before the price changes.
a. Are you now buying more or fewer circus tickets than before?
b. Can you still afford your original consumption bundle?

3. It is common for supermarkets to carry both generic (store-label) and brand-name


(producer-label) varieties of sugar and other products. Many consumers view these
products as perfect substitutes, meaning that consumers are always willing to substitute
a constant proportion of the store brand for the producer brand. Consider a consumer
who is always willing to substitute four kilograms of a generic store-brand sugar for two
kilograms of a brand-name sugar.
a. With brand-name sugar on the vertical axis and generic sugar on the horizontal
axis, illustrate the indifference curves for the consumer. [The indifference
curves do not take the conventional shape. Think about what happens to the
slope of a given indifference curve at different quantity combinations.]
b. Do these preferences exhibit a diminishing marginal rate of substitution
between store-brand and producer-brand sugar?
c. Assume that this consumer has $24 of income to spend on sugar, and the price
of store-brand sugar is $1 per kilogram and the price of producer-brand sugar
is $3 per kilogram. How much of each type of sugar will be purchased?
d. How would your answer change if the price of store-brand sugar was $2 per
kilogram and the price of producer-brand sugar was $3 per kilogram?

4. Suppose that you spend your income on two goods, X and Y. Suppose that your
preference can be represented by the utility function U(x, y) = xy, where x and y

1
denote the consumption for the two goods respectively. Your indifference curves
are therefore all described by equations of the form xy = constant, with a different
constant utility level for each indifference curve. For any given indifference curve,
with X on the horizontal axis and Y on the vertical axis, the slope at any given
point Z = (x, y) is equal to – y/x.
a. Suppose that your income is $40, the price of X is $1, and the price of Y is
$1. How much X do you buy? [These indifference curves take the
conventional shape. Think about what condition(s) need to be satisfied at
the optimal consumption bundle.]
b. Suppose that your income and the price of Y remain the same as in (a), but
the price of X rises to $4. Now how much X do you consume?
c. Based on your answers to parts (a) and (b), draw two points on your
demand curve for X. [Place X on the horizontal axis and PX on the vertical
axis.]
d. After the price of X rises from $1 to $4, suppose that your income rises by
just enough to bring you back to your original indifference curve. How
much X do you buy? [Hint: With the new relative price, the ratio of optimal
consumption y*/x* can be determined. The consumption point we wish
to solve for should satisfy the condition that MRS = -relative price and also
x*y* yields the same utility level as the initial consumption bundle identified
in part (a).]
e. When the price of X rises from $1 to $4, how much for the change in your
consumption is due to the substitution effect? How much is due to the
income effect?

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