ECON 410: Homework #3

Directions:
1. This assignment is due by 11:59pm on Wednesday, February 5. An answer key will be
posted on Canvas under Resources in the Homework Assignments folder at 12:15am
Thursday morning. It’s your responsibility to allow enough time before submission to
safeguard against technical glitches.

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Multiple Choice Questions (5 points each)

1. A consumer has $240 to spend on goods x and y. The price of x is $8, and the price of y is
$4. The consumer’s utility is represented by U(x,y) = x1/3y2/3. What is his utility-maximizing
bundle given his budget constraint?
a. x=16 and y=28
b. x=10 and y=40
c. x=20 and y=30
d. x=12 and y=36
e. x=0 and y=60

2. A consumer’s preferences for goods X and Y are described by a Cobb-Douglas utility

function. The price of X is $15, and the price of Y is $5. The consumer is currently
maximizing her utility given her budget constraint by consuming 4 units of X and 8 units of
Y. What can we infer at this point?
a. MUX = MUY
b. MUX = 2MUY
c. 2MUX = MUY
d. 3MUX = MUY
e. MUX = 3MUY

3. Consider an individual with the following preferences: 𝑈(𝑥, 𝑦) = 𝑥1/2 + 𝑦 1/2. The price of x
is $4. The price of y is $2. Which of the following bundles could be a utility-maximizing
bundle for the right income?
a. x=4 and y=16
b. x=10 and y=20
c. x=48 and y=12
d. x=12 and y=6
e. x=25 and y=25
4. Taylor’s preferences for goods X and Y can be described by U(X,Y) = X + 2ln(Y). Taylor has
an income of $100 and faces prices PX = PY = $20. What is Taylor’s utility-maximizing
bundle given her budget constraint?
a. X=0 and Y=5
b. X=1 and Y=4
c. X=2 and Y=3
d. X=3 and Y=2
e. X=4 and Y=1
f. X=5 and Y=0

5. Consider an individual with $150 to spend. The price of x is $5, and the price of y is $15. If
the individual has a utility function of the form U(x,y) = x2 + y2, what is the utility-
maximizing bundle given the budget constraint?
a. x=3 and y=9
b. x=15 and y=5
c. x=8 and y=4
d. x=0 and y=10
e. x=30 and y=0

6. Billy is currently spending his entire candy budget on 20 candy bars and 30 lollipops. The
price of a candy bar is $1.50, and the price of a lollipop is $0.50. His preferences are rational,
monotonic and convex. At his current bundle, he is willing to trade a maximum of 5 candy
bars for 10 more lollipops. Which of the following statements is TRUE at his current bundle,
assuming candy bars are on the y-axis and lollipops are on the x-axis?
a. His bang per buck is higher for candy bars than lollipops, and his indifference curve is
steeper than his budget line.
b. His bang per buck is higher for lollipops than candy bars, and his indifference curve is
steeper than his budget line.
c. His bang per buck is higher for candy bars than lollipops, and his indifference curve is
flatter than his budget line.
d. His bang per buck is higher for lollipops than candy bars, and his indifference curve is
flatter than his budget line.
7. Veronica eats tomato sandwiches for lunch and must consume bread and tomatoes together
in a fixed proportion. Specifically, she requires exactly 5 slices of tomato (T) to go with
every 2 slices of bread (B). Veronica has $18 to spend on bread and tomatoes, each slice of
bread costs 50 cents, and each slice of tomato costs 25 cents. Her utility function is ______
and her optimal bundle is ______.

a. U(B,T)=min(2B,5T); 14 slices of bread and 44 slices of tomato

b. U(B,T)=min(5B,2T); 14 slices of bread and 44 slices of tomato
c. U(B,T)=min(2B,5T); 16 slices of bread and 40 slices of tomato
d. U(B,T)=min(5B,2T); 16 slices of bread and 40 slices of tomato

8. Neil views sugar (S) and artificial sweetener (A) as perfect substitutes. He is always willing
to trade 3 teaspoons of sugar for 2 teaspoons of artificial sweetener. Suppose the price of a
teaspoon of sugar is $0.75, and the price of a teaspoon of artificial sweetener is $0.25. Neil
has $6 to spend on these goods. His preferences can be represented by the utility function
______ , and his utility maximizing bundle given his budget constraint is ______.

a. U(S,A) = 2S + 3A; S=0 and A=24

b. U(S,A) = 3S + 2A; S=0 and A=24
c. U(S,A) = 2S + 3A; S=8 and A=0
d. U(S,A) = 3S + 2A; S=8 and A=0

9. Fred likes cats (C) and dogs (D). He views them as perfect substitutes and is always willing
to trade 2 cats for 1 dog. The price of a cat is PC, and the price of a dog is denoted PD. Fred’s
optimal bundle will necessarily contain
𝑃 𝑃
a. Only dogs if 𝑃𝐷 < 2 and only cats if 𝑃𝐷 > 2.
𝐶 𝐶
𝑃𝐷 𝑃𝐷
b. Only cats if 𝑃 < 2 and only dogs if 𝑃 > 2.
𝐶 𝐶
𝑃𝐷 1 𝑃𝐷 1
c. Only dogs if 𝑃 < 2 and only cats if 𝑃 > 2.
𝐶 𝐶
𝑃𝐷 1 𝑃𝐷 1
d. Only cats if 𝑃 < 2 and only dogs if 𝑃 > 2.
𝐶 𝐶

10. For which of the following utility functions will there always be only a corner solution?
a. 𝑈(𝑋, 𝑌) = min(𝑋, 3𝑌)
b. 𝑈(𝑋, 𝑌) = 𝑋 2 + 𝑌
c. 𝑈(𝑋, 𝑌) = 𝑋1/2 𝑌1/2
d. 𝑈(𝑋, 𝑌) = 𝑋 + 2𝑌1/2
e. None of the above
Long Form Questions
1/4 3/4
1. Jen’s preferences over housing and food are given by U(F,H) = F H , where H is the
quantity of housing and F is the quantity of food (per month). Suppose Jen has a stipend of
$600/month, which she uses to purchase food at a price of $1/unit and housing at a price of
$10/unit.
a. Use the Lagrangian method to determine Jen’s utility-maximizing bundle given her
budget constraint. (8 points)

b. Jen's employer subsidizes housing by paying 50% of her total housing costs, effectively
lowering the price Jen pays to $5/unit. Determine Jen's new optimal consumption bundle.
You are not required to use the Lagrangian method for this part. (4 points)

c. Now suppose that instead of subsidizing housing, her employer instead gives Jen $400 as
a lump sum to spend as she’d like. Determine Jen's new optimal consumption bundle.
You are not required to use the Lagrangian method for this part either. (4 points)

d. On one graph with food on the x-axis and housing on the y-axis, depict Jen’s utility-
maximizing bundles from parts b and c using indifference curves and budget lines.
(Hints: 1. Calculate the utility Jen derives in parts b and c to determine which bundle
should be on a higher IC. 2. You can figure out where the budget lines from parts b and c
cross by writing down the equation for both budget lines, solving each for F, and then
setting them equal. 3. Both bundles are utility maximizing bundles where MRS=MRT
and should be drawn to reflect this.) (9 points)

2. Jackson’s preferences over fruit (F) and vegetables (V) can be described by
U(F,V) = FV + 5V. His budget is $40, the price of fruit is $5/pound, and the price of
vegetables is $5/pound.
a. Use the Lagrangian method to calculate the bundle Jackson will choose to maximize
his utility given his budget constraint. (8 points)
b. Now suppose the price of fruit rises to $10/pound. Redo part a. You are not required to
use the Lagrangian method for this part. (4 points)
c. Calculate Jackson’s MRS of fruit for vegetables at this new utility maximizing bundle.
How does it compare to the MRT of fruit for vegetables? (4 points)
d. On one graph with fruit on the x-axis and vegetables on the y-axis, depict Jackson’s
utility-maximizing bundles using indifference curves and budget lines, both before and
after the price of fruit changes. (9 points)