Assignment 1 deadline for submission Feb 1,2022

Solutions to Problems
1. Adam consumes two goods: housing and food.
a) Suppose we are given Adam’s marginal utility of housing and his marginal utility of food
at the basket he currently consumes. Can we determine his marginal rate of substitution of
housing for food at that basket?
b) Suppose we are given Adam’s marginal rate of substitution of housing for food at the
basket he currently consumes. Can we determine his marginal utility of housing and his
marginal utility of food at that basket?

2. Suppose Michael purchases only two goods, fish (F) and chips (C).
a) What is the relationship between MRSF,C and the marginal utilities MUF and MUC ?
b) Draw a typical indifference curve for the case in which the marginal utilities of both goods
are positive and the marginal rate of substitution of fish for chips is diminishing. Using your
graph, explain the relationship between the indifference curve and the marginal rate of
substitution of fish for chips.
c) Suppose the marginal rate of substitution of fish for chips is constant. In this case, are fish
and chips perfect substitutes or perfect complements?
d) Suppose that Michael always wants two orders of fish along with every sachet of chips.
Draw a typical indifference curve. In this case, are fish and chips perfect substitutes or perfect
complements?

3. Suppose a consumer is currently purchasing 47 different goods, one of which is

housing. The quantity of housing is measured by H. Explain why, if you wanted to measure
the consumer’s marginal utility of housing (MUH) at the current basket, the levels of the other
46 goods consumed would be held fixed.

4. Jimmy has the following utility function for sausages: U(S) = 10S − S2, with MUS =
10 − 2S
a) Plot the utility and marginal utility functions on two separate graphs.
b) Suppose that Jimmy is allowed to consume as many sausages as he likes and that hot dogs
cost him nothing. Show, both algebraically and graphically, the value of S at which he would
stop consuming hot dogs.

5. Consider the utility function U = xy with MUx = y/ and MUy = x.

a) Does the consumer believe that more is better for each good?
b) Do the consumer’s preferences exhibit a diminishing marginal utility of x? Is the marginal
utility of y diminishing?
6. Julie and Toni consume two goods with the following utility functions:
Julie
U = (x + y)2, MUJuliex = 2(x + y), MUJuliey = 2(x + y)
UToni = x + y, MUTonix = 1, MUToniy = 1
a) Graph an indifference curve for each of these utility functions.
b) Julie and Toni will have the same ordinal ranking of different baskets if, when basket A is
preferred to basket B by one of the functions, it is also preferred by the other. Do Julie and
Toni have the same ordinal ranking of different baskets of x and y? Explain.

7. Adam likes his café latte prepared to contain exactly 1/4 espresso and 3/4 steamed
milk by volume. On a graph with the volume of steamed milk on the horizontal axis and the
volume of espresso on the vertical axis, draw two of his indifference curves, U1 and U2, with
U2 > U1.

8. Suppose a consumer’s preferences for two goods can be represented by the Cobb–Douglas
utility function U = xαyβ , where α, and β are positive constants. The marginal utilities are
MUx = αxα−1yβ and MUy = βxαyβ−1.
a) Write down the consumer’s utility maximization problem. Find his Marshallian
demand function
b) Find the indirect utility function
c) Write down Roy’s identity , and verify it for x
d) Write down the consumer’s expenditure minimization problem. Find his Hicksian
demand function.
e) Find his expenditure function.
f) Write down Shephard’s lemma, and verify it for y