Econ 7131 Spring 2011 Dr. J.

King

Assignment M2 solutions
3.1 Here we calculate the MRS for each of these functions: a. b. c. d. e. MRS = MUx/MUy = 3/1, indifference curves are straight lines. MRS = MUx/MUy = y/x, indifference curves are convex (MRS is diminishing). MRS = MUx/MUy = 1/2x0.5, MRS is diminishing MRS = MUx/MUy = -x/y, indifference curves are positively sloped! MRS = MUx/MUy = [[y(x+y)-xy]/(x+y)2]/[x(x+y)-xy]/(x+y)2 = [y(x+y)-yx]/[x(x+y)-xy] = y2/x2, MRS is diminishing f11 = f12 = f22 = 0, ICs are not strictly convex f11 = -0.25y0.5x-1.5<0, f1 = 0.5y0.5/x0.5 > 0, f2 = 0.5x0.5/y0.5 > 0, f12 = 0.25/y0.5x0.5 > 0, f22 = -0.25x0.5y-1.5<0, ICs are strictly convex f1 = 1/2x0.5 > 0, f2 = 1 > 0, f11 = -1/4x1.5 < 0, f22 = 0, f12 = 0, ICs are strictly convex f1 = x/(x2-y2)0.5 > 0 if x>y, f2 = -y/(x2-y2)0.5 < 0 if x>y, f11 = [(x2-y2)0.5-0.5x/(x2-y2)0.5]/(x2-y2) = (x2-y2-0.5x)/(x2-y2)1.5 ambiguous sign not necessarily strictly quasi-concave (from above, ICs are not convex) f1 = y/(x+y) > 0, f2 = x/(x+y) > 0, f11 = -y/(x+y)2 < 0, f12 = x/(x+y)2 > 0, f22 = -x/(x+y)2<0, ICs are strictly convex. MUx = y (constant), MUy = x (constant), MRS = y/x (diminishing) MUx = 2xy2 (increasing), MUy = 2x2y (increasing), MRS = y/x (diminishing) MUx = 1/x (decreasing), MUy = 1/y (decreasing), MRS = y/x (diminishing)

3.2

a. b. c. d.

e.

3.3

a. b. c.

This shows that monotonic transformations may affect diminishing marginal utility, but not the MRS. 3.4 a. The indifference curves are L-shaped, so they are not strictly convex since the average of two points on the same section will be located on the same indifference curve. b. Same as above, only they are not strictly concave c. Here, U((x1+x2)/2,(y1+y2)/2) = U(x1,y1) = U(x2,y2) so the indifference curve is neither convex or concave it is linear.

3.5

a. b. c. d. e.

U ( h, b, m, r ) Min ( h, 2b, m, 0.5r ) . A fully condimented hot dog. $1.60 $2.10 an increase of 31.25 percent. Price would increase only to $1.85 an increase of 15.625 percent.

3.7

a. The MRS is 1/3 at both points and they lie on a straight line with slope = -1/3. Assuming the IC is a straight line, MUx/MUy = 1/3 U = x+3y (or a monotonic transformation thereof). b. We know that for a Cobb Douglas utility function, MRS = y/ x. When x=8 and y=1, the MRS = /8 = = 2 . When x = 4 and y=4, the MRS is 2 / = 2 = 2 . U(x,y) = x2/3y1/3 (or a monotonic transformation thereof). c. We only needed the MRS at one point to find this and we didnt need to know that the points are on the same indifference curve. 3.8 a. C1/ = zx / y b. U = x2 + y2 c. U = xz2 + x2y
/

U=x y z

3.9

a.

b. Any trading opportunities that differ from the MRS at x , y will provide the opportunity to raise utility (see figure). 3.10 a. This result does not depend on the sum + which has no significance in consumer theory because utility is unique only up to a monotonic transformation. b. Mathematics follows directly from part a. If > the individual values x relatively more highly; hence, dy dx ! 1 for x = y. c. The function is homothetic in ( x  x0 ) and ( y  y0 ) , but not in x and y since the MRS does not depend only on the ratio or x to y (page 54).

3.11

From problem 3.2, f12 0 implies diminishing MRS providing f11 , f 22  0 . Conversely, the Cobb-Douglas has f12 ! 0, f11 , f 22  0 , but also has a diminishing MRS (see problem 3.8a).