Quiz – 2

BM 2023-25 (MGE)
Time: 30 Minutes.
Total Marks = 20.
Answer All Questions

Instructions
1. This is a closed book examination. No notes, no neighbours.
2. Each of you must bring pens with two different coloured inks and a pencil.
Try to avoid red colour. Black and blue coloured pens are ideal.
3. No mobile phones, iPads or smart watches are allowed. These items are
strictly prohibited.
4. Clearly show your reasoning, steps, and calculations for all questions.

1)
Dr. Strangetaste buys only French fries (F) and hot dogs (H) out of his
income. He has positive marginal utilities for both goods, and his
𝑀𝑈𝐻 ⁄𝑀𝑈𝐹 is increasing. The price of hot dogs is PH, and the price of French
fries is PF.
Draw several of Dr. Strangetaste’s indifference curves. Show that the point
of tangency does not represent a basket at which utility is maximized, given
the budget constraint. Using the indifference curves you have drawn,
indicate on your graph where the optimal basket is located. [8]

Answer.

1
a) F
Preference
Directions

A
B
C
H

b) At point A, Dr. Strangetaste’s indifference curve, which is bowed out

from the origin, is tangent to his budget line. This point is not an optimum
because, for example, Dr. Strangetaste could move to point B on his budget
line and achieve a higher level of total utility.
Point B, though, is not an optimum either because Dr. Strangetaste could
move to point C, a corner point, to achieve an even higher level of total
utility.
When the MRS is increasing, a corner point optimum (Point C in this case)
will occur (with 𝐹 ∗ = 0 in this picture, though please note that it could
equivalently be with 𝐻 ∗ = 0 for another set of indifference curves).

2)
Vanna Boogie likes to have large parties. She also has a strong preference
for having exactly as many men as women at her parties. In fact, Vanna’s
preferences among parties can be represented by the utility function
𝑈(𝑥, 𝑦) = min{2𝑥 − 𝑦, 2𝑦 − 𝑥} where x is the number of women and y is the
number of men at the party. Draw the indifference curve along which
Vanna’s utility is 10.
Now show (on the graph) the points for which all the combinations that
Vanna thinks are just as good as (10, 10) but where there are more women
than men.

2
Suppose that there are 9 men and 10 women at Vanna’s party. Would Vanna
think it was a better party or a worse party if 5 more men came to her
party?
If Vanna has 16 women at her party and more men than women, and if she
thinks the party is exactly as good as having 10 men and 10 women, how
many men does she have at the party?
If Vanna has 16 women at her party and more women than men, and if she
thinks the party is exactly as good as having 10 men and 10 women, how
many men does she have at her party?
[12]
Answer.

(i) (10, 10) is the preferred consumption point that gives utility of 10. And
the V-shaped locus (bordered with red ink) in the graph above depicts the
Indifference curve for along which Vanna’s utility is 10.
(ii) Shown in the graph above.
(iii) Please note the following:
3
When there’s more women (x) than men (y), the relevant utility is
𝑈(𝑥, 𝑦) = min{2𝑥 − 𝑦, 2𝑦 − 𝑥} = 2𝑦 − 𝑥
When there’s more men than women, the relevant utility is
𝑈(𝑥, 𝑦) = min{2𝑥 − 𝑦, 2𝑦 − 𝑥} = 2𝑥 − 𝑦
If 5 more men came, then her utility would be 𝑈(𝑥, 𝑦) = 2𝑥 − 𝑦 = 2 × 10 −
14 = 6, which is less than the earlier case with 9 men and 10 women that
had fetched utility of 𝑈(𝑥, 𝑦) = 2𝑦 − 𝑥 = 2 × 9 − 10 = 8. Hence it is worse
for her.

(iv) When 16 women at the party with more men than women which fetches
utility of 10 (since same utility as having 10 men and 10 women), then that
means we have:
𝑈(𝑥, 𝑦) = 2𝑥 − 𝑦 = 2 × 16 − 𝑦 = 10
Or,
𝑦 = 32 − 10 = 22.
Hence, she has only 22 men at the party.

(v) When 16 women at the party with more women than men which fetches
utility of 10 (since same utility as having 10 men and 10 women), then that
means we have:
𝑈(𝑥, 𝑦) = 2𝑦 − 𝑥 = 2𝑦 − 16 = 10
Or,
𝑦 = (16 + 10)⁄2 = 13.
Hence, she has only 13 men at the party.