ECON 207

Fall 2019
Quiz II

Instructions: Please write your answers clearly and legibly. Pro-

vide full explanations for your answers and show all your work.

1. Consider an economic agent who has preferences over the bundles (x; y),
which is represented by the following utility function:

U (x; y) = xy 2

(a) What is the slope of the agent’s indi¤erence curve at the consumption
bundle (2; 1)?
dy Ux y2
M RS = = =
dx Uy 2xy
At (2; 1); the slope of the indi¤erence curve is equal to - 14
(b) Find the utility maximizing consumption levels, if the price of good
x is Px ; price of good y is Py ; and the agent has I dollars to spend.
Explain your answer clearly.

max U (x; y)
s:t:
I px x py y = 0

L =xy 2 + (I px x py y)
F.O.C
@L
= y2 px = 0 =) y 2 = px (1)
@x
@L
= 2xy py = 0 =) 2xy = py (2)
@y
@L
=I px x py y = 0 (3)
@
y px 2px x
Equations (1) and (2) imply that 2x = py =) y = py
Using equation (3) I = px x+py 2ppxy x =) x (px ; py ; I) = I
3Px ; y (px ; py ; I) =
2px I 2I
py 3Px = 3Py

(c) Calculate the indirect utility function. If Px = 1; Py = 1 and I = 6;

what is the maximum utility level that the agent can attain?
4I 3
Indirect utility function V ((px ; py ; I) = x y 2 = 3PI x [ 3P
2I 2
y
] = 27pxp
2
y

4 63
V (1; 1; 6) = = 32
27