Econ 501: Microeconomic Theory

Fall 2006-2007
Preferences and Utility
Problem Set 1
Due to Oct. 05 @ 16:30 hrs
1.

Fred has a utility function of U(C, T) =10C2 T3.

a.
b.
c.
d.
e.

2.

Calculate UC and UT.

Explain in words what these (results of part a) represent.
Write the total differential for U.
Using the result of part c, calculate dC/dT for dU=0.
Explain in words (using the language of economics) what the results of
part d represent.

The CES utility function is given by the following equation when 0.

U(X,Y)=
U(X,Y)=X / +Y /
a. Find MUX and MUY for this function.
b. Is the CES function homothetic? Explain.

3. As we saw in Figure 3.5(In Nicholson 9th Ed.), one way to show convexity of
indifference curves is to show that, for any two points (x1, y1) and (x2, y2) on an indifference
curve that promises U = k, the utility associated with the point is at least as great as k. Use
this approach to discuss the convexity of the indifference curves for the following three
functions. Be sure to graph your results.
a. U(x,y) = Min (x,y)
b. U(x,y) = Max (x,y)
c. U(x,y) = x + y.
4. Example 3.3(In Nicholson 9th Ed.) shows that the MRS for the Cobb-Douglas function
U(x, y) = x y

is given by

MRS = / (y / x)

a. Does this result depend on whether + = 1? Does this sum have any relevance to
the theory of choice?
b. For commodity bundles for which y = x, how does the MRS depend on the values of
and ? Develop an intuitive explanation of why if > , MRS > 1. Illustrate your
argument with a graph.