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HMK 4
HMK 4
Exercise 1
Marie’s utility function is u(x1 , x2 ) = min{3x1 +2x2 , 2x1 +5x2 }, where x1 is the number
of units of sugar she consumes and x2 is the number of units of spice she consumes.
She is currently consuming 12 units of sugar and 40 units of spice and she is spending
all of her income.
(1) Draw a graph showing her indifference curve through this point.
(2) The price of spice is $1. In order for this to be her consumption bundle, what
must the price of sugar be and what must be her income?
Exercise 2
Denote French restaurant by F , Italian restaurant by I, and Chinese restaurant by C.
Let X = {F, I, C}. Consider the choice structure (B, C(.)) with
and C({F, I}) = {F }, C({I, C}) = {I}, and C({F, C}) = {C}. Show that (B, C(.))
violates the WARP.
Exercise 3
Consider a consumer who consumes two goods and has utility function
√
u(x1 , x2 ) = x2 + x1 .
Exercise 4
You are given the following partial information about a consumer’s purchases. He
consumes only two goods.
Year 1 Year 2
Quantity Price Quantity Price
1
Note that you do not know how his income has changed from year 1 to year 2. Over
what range of quantities of good 2 consumed in year 2 would you conclude:
(1) That his behavior is inconsistent (i.e., in contradiction with the WARP)?
(2) That good 1 is an inferior good (at some price) for this consumer? (Assume that
the WARP is satisfied)