ECON 410: Problem Set #4

Directions:
1. This assignment is due by 11:59 pm on Wednesday, September 16.

2. Your answers must be submitted through Sakai. You can find “Problem Set #4” under Tests
& Quizzes on Sakai.

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4. For each question, select the one best answer. Answer 8 out of 10 questions correctly to pass.
1. Yina’s preferences over goods x and y are represented by 𝑈(𝑥, 𝑦) = 𝑥1/2 + 𝑦 1/2. What is her
demand function for good x? Let px denote the price of x, let py denote the price of y, and let I
denote income.

𝐼
a. 𝑥 = 𝑃𝑦
𝑃𝑥 (1+ )
𝑃𝑥

𝐼
b. 𝑥 = 𝑃
𝑃𝑥 (1+ 𝑥 )
𝑃𝑦

𝐼
c. 𝑥 = 1+𝑃
𝑥

𝐼𝑃
d. 𝑥 = 1+𝑃𝑥
𝑥

(See Besanko 5.6 and 5.8 and Demand and Elasticity Practice Problem #1.)

2. Suppose Jay’s utility function is given by U(x,y) = min(3x,4y). Let px denote the price of x, let py
denote the price of y, and let I denote income. The equation for his demand function for good y is
𝐼
a. 𝑦 = 4
𝑝𝑥 + 𝑝𝑦
3

𝐼
b. 𝑦 = 3
𝑝 + 𝑝𝑦
4 𝑥

𝐼
c. 𝑦 = 4
𝑝𝑥 + 𝑝𝑦
3

𝐼
d. 𝑦 = 3
𝑝𝑥 + 𝑝𝑦
4

(See Besanko 5.7 and Demand and Elasticity Practice Problem #2.)
3. Katie’s utility function is 𝑈(𝑥, 𝑦) = 2ln (𝑥) + 𝑦. What must be true for Katie to be at an interior
solution?
𝐼
a. 𝑃𝑦 < 2
𝑃𝑥
b. 𝑃𝑦 < 2
𝐼
c. 𝑃𝑥 < 𝑃
𝑦

𝑃𝑦
d. 𝑃𝑥 < 2

(See Besanko 5.16 and Demand and Elasticity Practice Problem #3.)

4. Through some fancy Lagrangian techniques, you find an individual’s demand function for good
3 1/2
x to be: 𝑥 = 𝑃 2 − 𝑃𝑦 𝑃𝑥 . Consider the 4 statements (a-d) below. Which of these statements, if
𝑥 𝑃𝑦

any, is not necessarily true? Assume an interior solution.

a. As the price of good y goes up, this individual will consume less of good x.
b. The demand curve for good x is downward sloping.
c. The Engel curve for good x is vertical.
d. The price consumption curve (as the price of x changes) is downward sloping.
e. All of the above statements are necessarily true.

(See Demand and Elasticity Practice Problem #4.)

5. Assume an individual has preferences represented by the utility function 𝑈(𝑥, 𝑦) = 𝑥𝑦 + 𝑦.

Which of the following statements is necessarily true, assuming an interior solution?
a. The price consumption curve (as the price of x changes) slopes downward.
b. The income consumption curve slopes downward.
c. Cross-price elasticity of demand for good x with respect to the price of y is negative.
d. Price elasticity of demand for good y is positive.
e. All of the above statements are false.

(See Besanko 5.6 and 5.16 and Demand and Elasticity Practice Problem #5.)
6. Taylor’s preferences for goods x and y are given by the utility 𝑈(𝑋, 𝑌) = 𝑋1/3 𝑌1/2 . Use
elasticity of demand to predict what will happen to her consumption of good x if the price of
good x decreases by 12%.

a. 0

b. + 4%

c. + 6%

d. + 12%

e. + 24%

(See Demand and Elasticity Practice Problems #6 and 7.)

7. David has a quasi-linear utility function of the form U(x, y) = √x + y. Which describes his
income consumption curve, assuming an interior solution?
a. upward sloping
b. downward sloping
c. vertical
d. horizontal
e. undefined

(See Demand and Elasticity Practice Problem #8.)

8. Assume an individual has preferences of the form 𝑈(𝑥, 𝑦) = (3𝑥 − 2)1/2 𝑦 1/2. What is his
cross-price elasticity of demand for good y with respect to the price of good x? Assume the
individual is currently consuming both goods.
a. 𝜀𝑦,𝑥 = 0
1
b. 𝜀𝑦,𝑥 = − 3𝑃
𝑦

𝑃𝑥
c. 𝜀𝑦,𝑥 = − 3𝐼
−𝑃𝑥
2

𝑃
d. 𝜀𝑦,𝑥 = − 3𝑃𝑥
𝑦

9𝑃𝑦 1
e. 𝜀𝑦,𝑥 = (4𝑃 ) 𝐼 9𝑃𝑦
𝑥 ( − )
𝑝𝑦 4𝑃𝑥

(See Demand and Elasticity Practice Problems #6 and 7.)

9. Consider the truthfulness of the following statement.

I. If the price consumption curve (as the price of good x changes) is vertical, then the price
elasticity of demand for good x is zero.
II. If the price consumption curve (as the price of good x changes) is vertical, then the cross-
price elasticity of demand for good y with respect to the price of good x is necessarily
positive.

a. Only statement I is true.

b. Only statement II is true.
c. Both statements I and II are true.
d. Neither statement is true.

(See Besanko 5.4 and Demand and Elasticity Practice Problems #9 and 10.)
10. Consider the truthfulness of the following statement.

I. If the income consumption curve is downward sloping, then good y is necessarily an

inferior good.
II. If the price consumption curve (as the price of good x changes) is upward sloping, the
demand curve for good x is necessarily downward sloping.

a. Only statement I is true.

b. Only statement II is true.
c. Both statements I and II are true.
d. Neither statement is true.

(See Besanko 5.4 and Demand and Elasticity Practice Problems #9 and 10.)