Economics 1110

Intermediate Microeconomics
Fall 2010
Homework 3: Choice and Demand
Instructors: Dror Brenner and Mongoljin Batsaikhan

The purpose of this homework is to derive optimal consumption bundles for di¤erent preference relations
Please note that by Friday 9/24 we only learned how to solve question 1 and 2. Next week you will have
enough knowledge to complete 3 and 4.
Homework is due in class: Monday, 10/4

1. For each of the following utility functions, prices and incomes derive the optimal bundle for the con-
sumer:

a: U (X1 ; X2 ) = X12 X23 P1 = 4; P2 = 6; M = 200

b: U (X1 ; X2 ) = X1 + X1 X2 + 3X2 P1 = 3; P2 = 2; M = 97
c: U (X1 ; X2 ) = min 2X1 ; X32 P1 = 4; P2 = 1; M = 50
1=2
d: U (X1 ; X2 ) = 6X1 + X2 P1 = 3; P2 = 2; M = 154

2. P1 = 4; P2 = 1; M = 1000: Bob’s utility function is: U (X1 ; X2 ) = X12 + X22 Mark’s utility function
1=2 1=2
is U (X1 ; X2 ) = X1 + X2

a: Compute the optimal consumption bundles for Bob and Mark.

b: Explain why their choices are di¤erent.

3. For each of the following utility functions compute and graph: Income O¤er Curve, Engel Curve, Price
o¤er Curve, Inverse Demand Function. Do the calculation and graphs for X1 only (holding P2 constant
so that price ratio changes are caused by changes in P1 ). State what type of good X1 is whenever the
question is relevant (Ordinary, Gi¤en, Normal etc.). Let prices and income be (before any change):
P1 = 1; P2 = 2; M = 1000:

(bonus 5 points) If there is any special property you can identify for a family of utility functions through
any of the functions you computed - state it (e.g.: for a quasi-linear function Engel curves are....)
a: U (X1 ; X2 ) = X1 + X2
b: U (X1 ; X2 ) = min fX1 ; X2 g
1=2
c: U (X1 ; X2 ) = X1 + X2

4. Optional: In the year 1970 the consumption of coconuts in Monkeyland was 10lbs per monkey. In the
year 1971 the coconut per capita consumption decreased to 9.5lbs per monkey. Between the two years
the price of coconut increased from 2$ to 2.42$. In addition we know that prices of all other goods
increased by 10% between 1970 and 1971. The income per monkey increased from 1000$ to 1133$.

a: Draw the budget lines for the two years. Draw coconuts on the horizontal axis and "all other
goods" on the vertical axis.
b: Is it possible to say that coconuts are an inferior good due to the drop in their consumption?