EC2013 Intermediate Microeconomics 1

Tutorial 2

Exercise 1
Pierre spends £36 per week on chocolate (C) and ice cream (Y). His preferences for
these goods are given by the utility function 𝑈(𝐶, 𝑌) = 2𝐶 + 𝑌. Suppose that price per
unit of C (𝑝𝐶) and that of Y (𝑝𝑌) are £2 each.

What is the utility maximising choice of C?

a) 18 units of C
b) Zero units of C
c) 9 units of C
d) 12 units of C

What is the utility maximising choice of Y?

a) Zero units of Y
b) 18 units of Y
c) 11 units of Y
d) 1 unit of Y

Exercise 2
Jimmy has the following utility function for hot dogs: 𝑈(𝐻) = 10𝐻 − 𝐻2.

a) Plot the utility and marginal utility functions (𝑀𝑈(𝐻) = 10 − 2𝐻) on two
separate graphs.

b) Suppose that Jimmy is allowed to consume as many hot dogs as he likes and that
hot dogs cost him nothing. Show, both algebraically and graphically, the value of
H at which he would stop consuming hot dogs.

c) How many will Jimmy buy if each hot dog costs him £2 and he has: (i) £4, (ii) £40?