BS2550 – Autumn 2021 Tutorial 1

TUTORIAL 1
Topics: Chapt. 2 / 3 / 4
(teaching week 3 & 4)

[1.1]
Consider now that Eric prefers bundle A = (1, 1) to B = (2, 1). Assume that this ranking holds
for any two bundles we present to him, where only the amount of good x increases from
bundle A to B. Are Eric's preferences monotonic? Are they strictly monotonic? What if he
prefers bundle C= (3, 3) to D = (2, 2), and a similar ranking holds for any two bundles where
the amount of both goods decreases from C to D?

[1.2]
Assume that Eric prefers bundles with more units of good x but fewer units of y.
If he cannot consume negative amounts of either good, can you find a bliss point
(i.e., a bundle where he is satiated)? Given your answer, do Eric’s preferences satisfy
nonsatiation? What about monotonicity?

[1.3]
Chelsea’s utility function is u(x; y) = 5x + 2y. Find the marginal utility for goods x
and y. Repeat your analysis, assuming that her utility function is u(x; y) = 5x - 2y.
Interpret.

[1.4]
Chelsea’s utility function is u(x; y) = 3x + 2y. Graph her indifference curve for utility levels
u = 10 and u = 20.

[1.5]
Chelsea has the following Cobb-Douglas utility function: u(x; y) = xy.
Assume that we apply any of the following transformations. Show that when we consider
increasing transformations, Chelsea’s ordering of bundles A = (1; 2) and B = (3; 8) is
unaffected (i.e., she still prefers B to A). When we consider decreasing transformations,
show that Chelsea’s ordering of bundles A and B may be affected.

(a) v(x; y) =[u(x; y)]2

(b) v(x; y) = ln[u(x; y)]

(c) v(x; y) = 5[u(x; y)]

(d) v(x; y) =[u(x; y)]−1

(e) v(x; y) = 7[u(x; y)]- 2

1
BS2550 – Autumn 2021 Tutorial 1

[1.6]
While out for dinner one night, Peter orders a large pepperoni pizza for himself. After eating
the first slice, he remarks that the pizza is delicious, and he’ll have another slice.
Slices two and three continue to receive accolades, but less so, with Peter expressing
that he is starting to feel full after the third slice. Peter decides to have a fourth slice,
after which he decides that he is full and prefers to eat no more pizza.
(a) What is happening to Peter regarding his utility?
(b) Suppose that Peter was dared to eat a fifth slice of pizza and accepted. Afterward,
he complains that he feels ill and leaves for the bathroom (rather hurriedly). What
has happened to Peter’s utility?

[1.7]
Consider a setting with only two goods, x and y. For each of the following utility functions,
provide two examples (other than those in the book), justifying why each utility function
represents preferences for that type of goods. You can consider goods in your daily life.
(a) Perfect substitutes
(b) Perfect complements
(c) Cobb-Douglas.

[1.8]
Consider an individual with utility function u(x; y) = min{x + 2y; 2x + y}.
Plot and interpret her indifference curve at a utility level of u = 10 units.