Microeconomics Question Set 4 Answer Key Tetsuro Mizoguchi

Question 1:
Consider an individual with utility function 𝑢(𝑥, 𝑦) = (𝑥 + 3)𝑦, and income 𝐼 = $30. The
price of good 𝑥 is 𝑝𝑥 = $2 while that of good 𝑦 is normalized to 𝑝𝑦 = $1 (that is, good 𝑦
represents the money left for purchasing all other goods but 𝑥, which we refer as the
numeraire).

a. Find the optimal consumption bundle of this individual. Evaluate his utility function at this
optimal bundle.

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b. Assume now that his income was increased by $10 dollars (for a total of 𝐼 ′ = $40). Which is
his new optimal consumption bundle? What is the new utility level he can reach?

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c. Assume now that the price of good 𝑥 decreases in $1, so its new price is 𝑝𝑥′ = $1. Which is
his new optimal consumption bundle? What is the new utility level he can reach?

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d. Assume now that he receives a coupon allowing him to consume 4 units of good 𝑥 for free.
Which is his new optimal consumption bundle? What is the new utility level he can reach?

e. In which setting of parts b-d is the consumer better off ? That is, describe whether the
consumer prefers the change in income from part b, the change in prices from part c, or the
coupon from part d.

Question 2:

Josh has a monthly income of 𝐼 = $700 and a quasilinear utility function of the type
𝑢(𝑥, 𝑦) = 𝑥 1⁄2 + 7𝑦. The price of good 𝑥 is $2 while the price of good 𝑦 is $3

a. Find Josh’s tangency condition.

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b. Find Josh′ s equilibrium quantities for goods x and 𝑦.

Question 3:
John wishes to reach a utility level of 𝑈 = 75 and has a utility function of the type 𝑢(𝑥, 𝑦) =
𝑚𝑖𝑛{3𝑥, 2𝑦}. The price of good 𝑥 is $2 while the price of good 𝑦 is $3.

a. What is John’s most preferred ratio of consuming good 𝑥 to good 𝑦?

b. Find John’s equilibrium quantities for goods 𝑥 and 𝑦.

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c. How much income does John require to reach his target utility level?

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Question 4:
Hanako wishes to reach a utility level of 𝑈 = 100 and has 91 a utility function of the type
𝑢(𝑥, 𝑦) = 5𝑥 + 2y. The price for good x is $3 and the price for good y is $1.

a. Find Hanako’s tangency condition

b. Find Hanako’s equilibrium quantities for goods x and 𝑦.

c. How much income does Hanako require to reach her target utility level?

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Question 5:
Taro wishes to reach a utility level of 𝑈 = 50 and has a Cobb-Douglas utility function of the
type 𝑢(𝑥, 𝑦) = 𝑥 0.4 𝑦 0.6 . The price for good 𝑥 is $1 and the price for good 𝑦 is $4.

a. Find Taro’s tangency condition.

b. Find Taro’s equilibrium quantities for goods 𝑥 and 𝑦.

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c. How much income does Taro require to reach his target utility level?