Microeconomic Theory

Econ3101
Summer 2014
Problem Set 2
Will Roberts
Department of Economics
University of Minnesota
This problem set is due on Monday, June 30th at the beginning of class. The maximum score is
100 points. Be sure to review the Syllabus for details about homework assignments and their grad-
ing. Feel free to contact me via e-mail if you have specic questions about the assignment. Note
that some Exercises have several parts, and each part may conceal more than one task for you. Be
sure to answer every question thoroughly, show your work, and staple your assignment for full credit!
Present all nal answers neatly on these provided pages. Show any relevant calculations neatly.
Please do your scratch work somewhere else. Please remember to attribute help received and col-
laboration.
Name:
List of People with Whom You Worked:
1
1. Lets get some practice plotting budget constraints. On the graph below, plot the budget con-
straints when:
a. (Use Black) : P
x
= 57, P
y
= 18, and M = 342.
b. (Use Blue) : P
x
/P
y
= 4/5 and M/P
y
= 20.
c. (Use Red) : M/P
x
= 14 and M/P
y
= 16.
d. (Use Pencil) : P
x
/P
y
= 4/5 and the bundle (19, 16) is on the boundary of the feasible set.
0 5 10 15 20 25
0
5
10
15
20
25
2. For the following problem, where the consumer has Leontief preferences, give the two optimality
conditions for x

and y

: (5 points each)
Max (min[x, 4y])
s.t. p
x
x + p
y
y m, x 0, y 0
a.)
b.)
Next, solve for the demand functions (neatly show work and circle answer): (5 points each)
c.) x

(p
x
, p
y
, m) =
d.) y

(p
x
, p
y
, m) =
e.) Graph the demand function for x

(p
x
, p
y
, m) when p
y
= 1 and m = 100 (place x on the x-axis
and p
x
on the y-axis)(5 points).
0 5 10 15 20 25
0
5
10
15
20
25
3.) Given a consumer with linear preferences:
u(x, y) = 3x + 4y
Graph the demand function for x* when M = 150 and p
y
= 20. Again, place x on the x-axis and
p
x
on the y-axis. (20 points)
0 5 10 15 20 25
0
5
10
15
20
25
4.) Given a consumer with Cobb-Douglas preferences, facing prices p
x
> 0, p
y
> 0 and income
m > 0:
u(x, y) = x
1/3
y
2/3
Concisely state a condition that explains why Cobb-Douglas preferences will guarantee an interior
solution: (3 points)
a.)
Solve for the marginal utilities and the Marginal Rate of Substitution:
b.) (3 points each)
MUx =
MUy =
MRS =
c.) Solve for the demand function for x and y (show your work): (3 points each)
x

(p
x
, p
y
, m) =
y

(p
x
, p
y
, m) =
d.) What fraction of income does the consumer spend on y? (2 points)
5.) Solve the utility maximization problem using the Kuhn-Tucker conditions for a consumer with
preferences (for full credit you must show all of your work and state any conditions necessary to
skip parts you may wish to.):(20 points)
Max (8 + x)(8 + y)
s.t
12x + 2y 240, x 0, y 0
**clearly p
x
= 12, p
y
= 2, m = 240