Bilkent University

Econ 101 - Fall 2021

Homework 1

Due: Monday, November 01, 23:59

Instructions: You are assigned into groups of three or four people to work
on this assignment. Work with your group and submit a single document (a
.pdf copy) to your TA by the due date. You can type your solutions into a
text processing software (such as Word) and convert it into .pdf, or write the
solutions by hand and scan it. If you handwrite your solutions, please use
legible handwriting: If we cannot read it, we cannot grade it. Only one member
of the group needs to submit the problem set. Each group member will receive
the same grade (as long as they contribute to the group: if your fellow group
members are unable to reach you, you will receive a zero for this homework).
Even though it is sufficient if only one group member submits on behalf of the
group, it is your responsibility to check the submitted homework and see that
it is “proper” (i.e., it contains all the pages and includes your name). If pages
are missing in your submission, we will not allow you to add these pages to your
submission later. We reserve our right to give you a zero if the document does
not contain your name. There is a premium for brevity and clarity, so think
about properly organizing your solutions and answers.

Questions
1) Suppose that a particular good is an inferior good for a consumer at her current
level of income. What can we say about the change in her consumption of
this particular good when the prices of all the goods—including this particular
good—double but her income stays the same?

2) A consumer who can consume only two goods, chooses the bundle (10, 5) as an
optimal bundle when the price of good 1 is 2 TL/unit, the price of good 2 is
4 TL/units. Given that this is the only information we have about the consumer,
can we say anything about his preferences between the bundles (10, 5) and (14, 2)
(does the consumer prefer (10, 5) to (14, 2), prefer (14, 2) to (10, 5), or is the
consumer indifferent between them). Explain your claim.

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3) The picture below shows two indifference curves of the preferences of a consumer
and tangents to these indifference curves at various points:

q2 (kg)

7.707

5.000

(3.85, 3.85)

3.243
(2.50, 2.50)

(7.39, 1.31)
(4.79, 0.85)

q1 (lt)
5.000 6.486 7.707 10.000

a. What is the marginal rate of substitution of good 2 for good 1 at the

bundle (7.39, 1.31)?
b. What is the optimal bundle when the consumers income is 10 TL, the
price of good 1 is 1 TL/lt and the price of good 2 is 2 TL/kg?
c. What would the change in the quantity of good 1 consumed be if the price
of good 1 increased to 2 TL/lt? How much of this change is due to income
effect and how much of it is due to substitution effect?

4) Consider a consumer, with smooth preferences, who has to decide on how much
of good 1 and good 2 to consume. The price of good 1 is p1 , the price of good 2
is p2 and the income of the consumer is I. If the consumers preference relation
is such that, for any bundle q = (q1 , q2 ),
r
q2
MRS2,1 (q) =
q1

what can you say about the bundle that the consumer will choose (i.e., find the
optimal bundle in terms of I, p1 , and p2 )?

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5) Consider a consumer whose preference is such that the indifference curves are
circles with center at the origin (hence the assumption of diminishing marginal
rate of substitution is violated but monotonicity is still satisfied). Some of the
indifference curves are show below:
q2 (kg)

q1 (kg)

If the income of the consumer is 4 TL, the price of good 1 is 1 TL/kg, and
the price of good 2 is 2 TL/kg what is the optimal bundle for this consumer?
Explain.

6) (15pts.) Consider a consumer in a two-good economy. Suppose that the con-

sumer’s income is 126 TL and the prices of the goods are 7 TL/unit and 9
TL/unit, respectively. Furthermore, the preferences of the consumer satisfy
our standard assumptions, i.e., completeness, transitivity, monotonicity, and
(weakly) decreasing marginal rate of substitution. Given that the consumer is
indifferent between the bundles, (18, 0), (9, 9), and (0, 18). What can we say
about her optimal bundle?

7) (25pts.) Consider a consumer who is faced with the decision of choosing how
much of two goods, say good 1 and good 2. The consumer’s preferences are
“smooth” and are such that: for any q = (q1 , q2 ) and q 0 = (q10 , q20 ),

q R q 0 ⇐⇒ (q1 )0.7 (q2 )0.3 ≥ (q10 )0.7 (q20 )0.3 .

Furthermore, the marginal rate of substitution of good 1 for good 2 at any

bundle q = (q1 , q2 ) is given by:
0.3q1
MRS1,2 (q1 , q2 ) = .
0.7q2
Find how much good 1 and good 2 the consumer will demand as a function of
his income (I), the price of good 1 (p1 ), and the price of good 2 (p2 ).