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UGBA101A Microeconomic Analysis for Business Decisions

Problem Set # 1
1. Martha has $150 of disposable income to spend each week and cannot
borrow money. She buys Malted Milk Balls and the composite good. Suppose
that Malted Milk Balls cost $2.50 per bag and the composite good costs $1
per unit.
a. Sketch Marthas budget constraint.
b. What is the opportunity cost, in terms of bags of Malted Milk Balls, of
an additional unit of the composite good?
2. In problem 1, suppose that in an inflationary period the cost of the composite
good increases to $1.50 per unit, but the cost of the Malted Milk Balls remains
the same.
a. Sketch the new budget constraint.
b. What is the opportunity cost of an additional unit of the composite
good?
3. In problem 1, suppose that Martha demands a pay raise to fight the inflation.
Her boss submits and raises her salary so that her disposable income is now
$225/wk.
a. Sketch the new budget constraint.
b. What is the new opportunity cost of an additional unit of the composite
good?
4. Picabo, an aggressive skier, spends her entire income on skis and bindings.
She wears out one pair of skis for every pair of bindings that she wears out.
a. Graph Picabos indifference curves for skis and bindings.
b. Now draw her indifference curves on the assumption that she is such
an aggressive skier that she wears out two pairs of skis for every pair
of bindings that she wears out.
5. Suppose that Picabo from question 4 has $3600 in income to spend on skis
and bindings each year. Find Picabos best affordable bundle of skis and
bindings under both of the preferences described in the previous problem.
Skis are $480/pair and bindings are $240/pair.
6. For Alexi, coffee and tea are perfect subsitutes: One cup of coffee is
equivalent to one cup of tea. Suppose Alexi has $90/month to spend on these
beverages, and coffee costs $0.90/cup and tea costs $1.20/cup. Find Alexis

best affordable bundle of tea and coffee. How much could the price of a cup
of coffee rise without harming her standard of living?
7. Continental long distance Telephone Service offers an optional package for instate calling whereby each month the subscriber gets the first 50 minutes of
instate calling free, the next 100 minutes at $0.25/minute and any additional
time at the normal rate of $0.50/minute. Draw the budget constraint for instate phone calls and the composite good for a subscriber with an income of
$400/month.
8. For the Continental long distance problem above, what is the opportunity cost
of making an additional 20 minutes of calls if he currently makes:
a. 40 minutes of calls each month?
b. 140 minutes of calls each month?
9. Tom spends all of his $100 weekly budget on two goods, X and Y. His utility
function is given by U(X,Y) = XY. If PX = 4 and PY= 10, how much of each good
should he buy?
10.Same as problem 9, except now Toms utility function is given by U(X,Y) = X
1/2
Y 1/2.
11.Note the relationship between your answers in Problems 1 and 2. What
accounts for this relationship?
12.Sue consumes only two goods, food and clothing. The marginal utility of the
last dollar she spends on food is 12 and the marginal utility of the last dollar
she spends on clothing is 9. The price of food is $1.20 per unit and the price
of clothing is $0.90/unit. Is Sue maximizing her utility?
13.Albert has a weekly allowance of $17 all of which he spends on music
downloads (M) and film downloads (F), whose respective prices are $4 and
$3. His utility from these purchases is given by U(M)+V(F). If the values of
U(M) and V(F) are shown in the table, is Albert a utility maximizer if he buys 2
music albums and 3 films? If not how should he reallocate his allowance?
M

U(M)

V(F)

12

21

20

33

24

39

28

42