Problem Set 1

Due: Sep 9, Wed

1. Consider the following utility functions:

a. U (x, y) = xy

b. U (x, y) = x2 y 2

b. U (x, y) = lnx + lny

Show that each of these has a diminishing MRS but that they exhibit constant, increasing,
and decreasing marginal utility, respectively. What do you conclude?

2. Consider the utility function on X = R2+ given by u(s) = u((x1 , x2 )) = αx1 + βx2 , for
α and β strictly positive constants. What do the indifference curves corresponding to this
utility function look like? Are these preferences monotone? Strictly monotone? Continu-
ous?

3. Describe each of the following three preference relations formally, giving a utility func-
tion that represents the preference wherever possible. Draw some representative indiffer-
ence sets.

a. The consumer prefers the bundle (x1 , x2 ) to the bundle (y1 , y2 ) if and only if (x1 , x2 )
further from (0, 0) than is (y1 , y2 ), where the distance between the (z1 , z2 ) and (z10 , z20 )
is q
is (z1 − z10 )2 + (z2 − z20 )2 .

b. The consumer cares first about the sum of the amounts of the goods; if the sum is
the same in two bundles, he prefers the bundle with more of good 1.