EC 203 - INTERMEDIATE MICROECONOMICS

Boğaziçi University
Department of Economics
Fall 2019
Problem Set 1

1. Draw indifferences curves to represent each of the following type of preferences.

(a) Quarters-dollars: A consumer is always happy to change 4 quarters for 1 dollar.

(b) Bicycle frames-tires: A consumer always wants 2 tires to go with 1 frame.

2. Tom always begins his day with a strawberry milkshake. He makes it by mixing milk (x) with five
strawberries (y). The secret of a really good milkshake lies in the optimal proportion of milk and fruit:
one glass always comes with five strawberries.

(a) Plot Tom’s representative indifference curves. Depict three indifference curves that pass through the
following bundles (5, 1), (10, 10) and (15, 4). What is the MRS at each of these points?
(b) What utility function represents these preferences? On the graph from (a), indicate the level of
utility corresponding to each indifference curve.
(c) Multiply your utility function by ten and add two to it. How did the indifference curves change?
How was the level of utility associated with each indifference curve affected?

3. Kate has two favorite kinds of apples: Fuji (x) and Gala (y). Kate loves them both and actually does
not distinguish between the two kinds.

(a) In a graph, show Kate’s indifference that pass through (2, 3) and (3, 3).
(b) Suggest two different utility functions that represent Kates preferences.
(c) Find the marginal rate of substitution.

4. Suppose the set of bundles is given by B = {B1 , B2 , B3 , B4 , B5 }. Also suppose that the preferences of
a consumer are given by B1  B2 ∼ B3 and B4  B5 . Can you represent these preferences by a utility
function? If you can give a utility function that does so. If not, explain why you cannot. Suppose now
we also have the information B5  B1 : Now, can you represent it with a utility function? If so, provide
one. If not explain.

5. Suppose a consumer’s preferences can be represented by the following utility function; u(x, y) = x + y.

(a) Show that the utility function v(x, y) = 10x + 10y represent the same preferences with u, that is, v
and u are monotonic transformations of each other.
(b) Show that the utility function z(x, y) = x + y 2 does not represent the same preferences with u, that
is, z is not a monotonic transformation of u.

6. Suppose a consumer’s preference relation, % is defined over the points in R2+ and is given as follows:
x % y iff x1 > y1 or [x1 = y1 and x2 ≥ y2 ]. Suppose this is a strongly monotone preference relation. How
do the indifference curves look like? Can you represent this preference relation by a utility function?

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 7. Jonas’s utility function is uJ (x, y) = xy. Martha’s utility function is uM (x, y) = 1000xy. Noah’s utility
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function is uN (x, y) = −xy. Ulrich’s utility function is uU (x, y) = −(xy+1) . Egon’s utility function
is uE (x, y) = xy − 10, 000. Claudia’s utility function is uC (x, y) = x − y. Helge’s utility function is
uH (x, y) = x (y + 1). Which of these people have the same preferences as Jonas?

8. For each of the following utility functions, find the marginal utilities (M Ux and M Uy ) and the marginal
rate of substitution between x and y, M RSxy , and explain whether M RSxy is diminishing or not.

(a) u(x, y) = 3x + y
(b) u(x, y) = x1/2 y
(c) u(x, y) = x1/3 y 2/3
(d) u(x, y) = x2 + 3y − 2
(e) u(x, y) = x1/2 + y
(f) u(x, y) = (x + 2y)2
xy
(g) u(x, y) = x+y
p
(h) u(x, y) = x2 + y 2

9. Consider the following utility functions:

u(x, y) = xy
u(x, y) = x2 y 2
u(x, y) = lnx + lny
Show that all three utility functions have the same marginal rate of substitution, M RSxy . Is this a
coincidence? Why, why not?

10. Suppose that the consumer’s utility function is as u(x, y) = x + xy

(a) Find the equation for indifference curves where u = 40. Sketch the indifference curve.
(b) Find M RSxy by using the equation found in part (a).
(c) Calculate marginal utilities.
(d) Find M RSxy by marginal utilities from part (c).
(e) Show that M RSxy found in part (b) and (d) are the same.

11. Al derives utility from three goods: music (m) , wine (w) and cheese (c). His utility function is of the
simple linear form u(m, w, c) = m + 2w + 3c.

(a) Assuming Al’s consumption of music is fixed at 10, determine the equations for the indifference
curves for w and c where u = 40 and u = 70. Sketch these curves.
(b) Show that Al’s MRS of wine for cheese is constant for all values of w and c on the indifference curves
calculated in part (a).
(c) Suppose Al’s consumption of music increases to 20. How would this change your answers in part (a)
and (b)? Explain it intuitively.