EE 758 Interenet Economics

Second Semester 2015-16

Homework 1
For the following seven problems, individual solutions are to be submitted at the beginning of class
on Wednesday, 03 February.
1. Define an indifference curve corresponding to a utility function. Let u(x1 , x2 ) be a monotone
utility function. Prove that the unit slope line through the origin intersects an indiference
curve exactly once.
2. Define perfect complements and perfect substitutes. Specify if any of the following utility

functions represent substitutes or complements. (1) u1 (x1 , x2 ) = x1 + x2 , (2) u2 (x1 , x2 ) =

min{ax2 , bx2 }, (3) u3 (x1 , x2 ) = x1 x2 , (4) u4 (x1 , x2 ) = x1 + x2 ,

3. Let u(x1 , x2 ) be a monotonic utility function. Define the marginal rate of substitution (MRS).
Claim: monotonic transformation of u does not change the MRS. Prove it or disprove it.
4. u(x1 , x2 ) = xb1 xc2 is called the Cobb-Douglas utility function. Determine the MRS for this
utility function.
5. Find a monotonic transformation of the Cobb-Douglas utility functions that makes the exponents sum to 1.
6. Consider a voice+data service. Let x1 be the consumption of voice in call-minutes and x2
the consumpton of data in MB in a month. Let p1 be the price per minute for voice calls
p2 be the price per MB for data. If your total budget was B, how would you determine
the optimum consumption? Note that this is not surplus maximisation but consuming to be
within a budget.
7. For the voice+data service of the previous problem, draw the suitable indifference curves
and explain the choice of your shape. Suggest an algebraic expression for the utility function
that yields the indifference curve that you are suggesting. Explain.
8. Now consider a voice+sms+data plan. Which of these are complementary and which of these
are substitutes, perfect or otherwise. Explain your answer.