Managerial Economics

Problem Set III

Submission Date: December 11

Q1. Appendix Chapter 3 (Q1-Q3) from Managerial Economics-William Samuelsson & Stephen
G. Marks, P127.

Q2. Suppose that a consumer’s utility function is U = Q1 2 Q2 2, If P1 = 5, P2 = 10, and the consumer’s
money income is M = 1,000, what are the optimal values of Q1 and Q2?

Q3. Assume one of sampled a freshman students in Arsi University, likes chocolate (X) and ice
cream (Y). Price of chocolate is 4 birr, price of ice cream is 6 birr, and sampled student monthly
budget for these two commodities is 200 birr. If consumer’s utility function for these two
1
commodities is U  2 XY 2
a. Find sample sampled fresh student equilibrium level of consumption of chocolate
(X) and ice cream (Y) per month.
b. What is sample students utility at the equilibrium level of consumption Fi
c. Find marginal rate of substitution of X for Y (MRSXY) at the equilibrium.
Q4. Given ( ) √ + √

Px= $1, drops to 0.5$

Py=$1 and Income=$90

a. Choice in changes of X and Y

b. How much change of x is due to substitution effect?
c. How much change is due to income effect?
Q5. How do you use consumer behavior theory in decision-making process?