UN 3211

Intermediate Microeconomics Section II

—
Problem Set 1 - Due Wednesday September 18 @
6pm (on Gradescope)

Instructor
Wouter V ERGOTE
]
Teaching Assistants
Yu Kyung Koh, Matt Mazewski, Alexander Unver-Papalexopoulos and Zhouyao Xie

Fall 2019
 Question 1 (2.5pts)
Consider the following 5 statements. Are they true, false or uncertain? Make sure to explain
your answer in order to obtain full credit.
1. A person who gives money away to people on the street does not have preferences that can
be represented by a utility function.
Solution:
Uncertain. The statement is not necessarily true. The person can prefer giving money to
someone on the street to keeping that money in his/her pocket. As long as his/her preferences
are be complete and transitive these preferences can be represented by a utility function. E.g.
If person prefers to give $1000 to Amy (who lives on the street) and would actually prefer
Julie (who also lives on the street) to receive $1000, compared to Amy, then this person
should also prefer to give $1000 to Julie, compared to keeping the $1000 in his/her pocket.
√
2. If Boris’s utility function is UB (x, y) = xy+1 and Theresa’s utility function is UT (x, y) = xy,
then Boris will always derive more happiness than Theresa does from any combination of x
and y.
Solution:
Uncertain. The utility function (or happiness function, or felicity function, or satisfaction
function) describes how people rank alternatives. A higher number for alternative A than
alternative B means that the person prefers alternative A over B. The utility function (or
happiness function, or felicity function, or satisfaction function) does not say anything about
the intensity of preferences. In other words, it cannot measure (put numbers) on ‘how happy’
a person is. Nor can we compare the ‘happiness’ or ‘utility’ level given the utility functions
of two different persons. All we can say is whether they have or not, the same preferences:
that is, we can answer the question whether the rank any two bundles in the same manner.
It turns out in this case that UB (x, y) = xy + 1 is a positive monotonic transformation of
√
UT (x, y) = xy, so Boris and Theresa have the same ‘preferences’: they rank all bundles in
exactly the same way.

3. If Donald’s utility function is UD (x, y) = x + y and Mike’s utility function is UM (x, y) = x2 y 2 ,

then Donald and Mike have the same preferences.
Solution:
False. Given the answer to 2., we see that UD (x, y) = x + y is not a positive monotonic
transformation of UM (x, y) = x2 y 2 . In particular note that Donald prefers bundle (4, 0) over
bundle (1, 1) while Mike prefers bundle (1, 1) over bundle (4, 0).
Another way to check if Donald and Mike have the same preferences is to check if they have
the same MRS. In this case:
∂UD (x,y)
Donald ∂x 1
M RSx,y (x, y) = ∂UD (x,y)
= =1
1
∂y
∂UM (x,y)
M ike ∂x 2xy 2 y
M RSx,y (x, y) = = =
∂UM (x,y) 2x2 y x
∂y
Donald M ike
⇒ M RSx,y (x, y) 6= M RSx,y (x, y)

Therefore, they do not have the same preferences.

4. A monotonic transformation of a utility function does not change the marginal rate of sub-
stitution at any point.

2
 Solution:
True. Remember the definition of a (positive) monotonic transformation of a utility function
given in class: Suppose that F : R+ → R is a (strictly) monotonic increasing function (with
strictly positive derivative F 0 (α) for all α ∈ R+ ). The function W : R2+ → R : W (x, y) =
F (U (x, y)) is then a positive monotonic transformation of the function U .
∂W
Now note that the MRS using utility function W is equal to ∂x
∂W .
∂y

Now note that, by using the chain rule, we can see that W (x, y) and U (x, y) have the same
MRS:
∂W ∂F ∂U ∂U
∂x ∂U ∂x ∂x
∂W
= ∂F ∂U
= ∂U
∂y ∂U ∂y ∂y
|{z} |{z}
MRS of W MRS of U

Therefore, a monotonic transformation of a utility function does not change the marginal
rate of substitution at any point.
Also note that using a negative montonic transformation would not have impacted the MRS
∂T
( ∂U would be negative instead of positive) even though a negative monotic transformation
would not represent the same preferences as U.

5. If Amy has downward-sloping indifference curves, then this is the same thing as saying that
she prefers averages to extremes.
Solution:
False. This statement is not necessarily true, because we also need that the preferences are
(strictly) convex such that the indifference curves are bowed inward. If the indifference curves
are bowed outward for instance, then Amy prefers extremes over averages.

Question 2 (2pts)
Alicia likes watching DVDs (x1 ) and listen to her favorite CDs (x2 ) . Her utility function is given
by
U (x1 , x2 ) = (x1 )3 (x2 )1

1. Find Alicia’s MRS, for an arbitrary bundle (x1 , x2 ) .

Solution:
The MRS for any bundle (x1 , x2 ) , is the slope of the indifference curve passing through that
point:
 
∂U1
M U1 ∂x2
M RS (x1 , x2 ) = =  
M U2 ∂u2
∂x2

Since
∂U ∂U
M U1 = = 3x21 x2 and M U2 = = x31
∂x1 ∂x2
We have that

3x2
M RS (x1 , x2 ) =
x1

3
 2. Plot Alicia’s indifference curve that passes through the bundle (1, 1). Find the MRS for this
bundle, and depict it on the graph. Which good is "locally more valued" at (1, 1) DVD or
CD? (Hint: good x is locally more valued than good y at consumption levels (x1 , y1 ) if at
these levels of consumption the consumer is willing to give up more than one unit of good y
in order to receive one more unit of good x.)
Solution:
The following graph plots Alicia’s indifference curve that passes through (1,1).

Using our answer in part 1, we get that M RS(1, 1) = 3. This tells us that the slope of the
indifference curve passing through the point (1, 1) is 3. At (1, 1), good one is locally more
valued since, to compensate for a loss of 3 units of good two (the CDs), Alicia only needs 1
unit of good one (the DVDs) to maintain the initial level of happiness/satisfaction.

Question 3 (2.5pts)
Walt always begins his day with a veggie shake. He makes it by extracting juice in the following
propertions: for any two cucumbers (x) he always uses three carrots (y).

1. In a diagram, plot Walt’s preferences (indifference maps). Depict three indifference curves
that pass through the following bundles (4, 4), (2, 6) and (3, 7). What is the MRS at each of
these points?
Solution:
Before we begin plotting, let’s first assume that Walt gets utility only from the veggie shake.
In this case, cucumbers and carrots are complements, because he needs a combination of
both 2 cucumbers and 3 carrots together to produce veggie shakes. Walt will not get any
utility from, say, 1 cucumber and 3 carrots, because that combination does not give him any
veggie shakes. I also assume that Walt can make a fraction of veggie shake (like half cup
instead of full cup) as long as he uses the right proportion of cucumbers to carrots.1
Keeping this in mind, let’s plot the indifference curves.
1
For those of you who assume that Walt can only make full cups of veggie shake, that is fine too. I will grade
accordingly based on your assumption.

4
 We have the following MRS for each point: M RSx,y (4, 4) = 0, M RSx,y (2, 6) = ∞, M RSx,y (3, 7) =
∞.

2. Find a utility function that represents these preferences. On the graph from 1) indicate the
level of utility corresponding to each indifference curve.
Solution:
n o
x y
One of the utility functions that represent these preference is U (x, y) = min 2, 3 . The level
of utility corresponding to each indifference curve is the following:
n o
• For the indifference curve that passes (2,6), U (2, 6) = min 1, 2 = 1
n o
3 7 3
• For the indifference curve that passes (3,7), U (3, 7) = min 2, 3 = 2
n o
• For the indifference curve that passes (4,4), U (4, 4) = min 2, 43 = 4
3

3. Multiply your utility function by ten and add to it constant equal to two. How did the
indifference map change (explain why)? How was the level of utility associated with the each
indifference curve affected?
Solution:
Because W (x, y) = 10(U (x, y))+2 is a positive monotonic transformation, this transformation
does not change the indifference map. Note that a utility function describes how people rank
alternative, but does not describe the exact amount of utility people get from each of the
alternatives. Hence, the level of utility associated with the each of indifference curve is not
affected.

5
 Question 4 (3pts)
Molly consumes two goods, good x and good y and her preferences are represented by the utility
function U (x, y) = x2 + 5y.

1. Draw (sketch) Molly’s indifference curves for U (x, y) = 16, U (x, y) = 25, U (x, y) = 50 and
for U (x, y) = 100.
Solution:

2. Do Molly’s preferences satisfy strict monotonicity? Explain briefly

Solution:
Yes. Remember that strict monotonicity implies “more is better." Looking at Molly’s utility
function U (x, y) = x2 + 5y, it is clear that as x or y increases, U (x, y) increases.

3. Do the indifference curves you’ve drawn reflect preferences that are convex? Explain briefly
Solution:
No, Molly’s indifference curve is not convex. Remember that the convex preference curve
looks like the following:

6
where the agent gets higher utility from more diverse bundle (point C) than extreme bundles
(A or B). However, Molly’s preference curves show that she prefers extreme bundles to diverse
bundles.