Heman Das Lohano

Assignment 1: Microeconomic Theory

Due on Wednesday, 31 January 2024
Note:
• Write your assignment by hand using a pen; computer typing is not allowed. Submit it
before the start of class on Wednesday.
• In case you cannot attend the class, temporarily submit a soft copy on LMS by the due
date and time. Additionally, submit a hard copy in the next class.
• Each assignment carries 5 marks. If any assignment is submitted after the due date and
time, 1 mark will be deducted for each day of late submission.

Q1:
A consumer receives utility from consuming good X and good Y as given by the following
utility function:
𝑈(𝑥, 𝑦) = 𝑥𝑦 3

where x denotes quantity of good X and y denotes quantity of good Y. The price of good X is
Px rupees per kg. The price of good Y is Py rupees per kg. The consumer’s total budget for
these two goods is denoted by I rupees per time period.

(a) Write the consumer’s utility maximization problem. Define the Lagrangian function for
this utility maximization problem. Write the first order necessary conditions.

(b) Find the Marshallian demand function for each good.

(c) Compute the expenditure share for each good.

(d) Check the second order condition to ensure that utility is maximized.

(e) Find the indirect utility function.

Q2:
A consumer receives utility from consuming good X and good Y as given by a utility
function:
𝑈(𝑥, 𝑦) = 20𝑙𝑛(𝑥) + 𝑦

where x denotes quantity of good X and y denotes quantity of good Y. The price of good X is
Px rupees per kg. The price of good Y is Py rupees per kg. The consumer’s total budget for
these two goods is denoted by I rupees per time period.

(a) Write the consumer’s utility maximization problem. Define the Lagrangian function for
this utility maximization problem. Write the first order necessary conditions.

(b) Suppose Px = 10 rupees per kg, Py = 10 rupees per kg, and I = 100 rupees. Compute the
optimal choice of good X and good Y that maximizes the consumer’s utility function
subject to the budget constraint.

(c) Find the Marshallian demand function for each good.

(d) Check the second order condition to ensure that utility is maximized.

(e) Find the indirect utility function.

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