KEY: Econ 100A, Quiz 3, 10 points, Dr.

Famulari

(1) Matt gets utility from apples and bananas and his preferences can be represented by the utility
function U(A,B)=A+4B. If the price of apples is 2 times the price of bananas, what is Matt's
ordinary demand function for apples, A*(pA, pB, I)?

ANSWER: A*=(pA, pB, I)=0 .

Matt has a perfect substitutes utility and he views 4 apples as just as good as one
banana. Apples are twice as expensive as bananas. He will maximize his utility by
consuming all bananas and no apples, B*=(pA, pB, I)=I /pB and A*=(pA, pB, I)=0 . (His
|MRS|=1/4 and the price ratio=2 since (MUA/ pA)< (MUB /pB), he will maximize his utility by
consuming all bananas.)

(2) David gets utility from X and Y and his preferences can be represented by the utility
function U(x,y)=min{X, 1/3Y}. David maximizes his utility subject to a budget
constraint. What is his Marshallian demand function for Y i.e., Y*(pX, pY, I)?

Answer: Y*=I/[Px/3+Py]

Use the facts that

(1) solution will be at a kink point, with no excess Y or X, so X*=1/3Y*
(2) utility maximizing bundle must be on the budget constraint (PxX*+ PyY* =I).
Substitute the expression for X* from (1) into the budget constraint in (2) to get: Px(Y*/3)+
PyY*)=I and then solve for Y*
(3) Toni’s utility over x1and x2 can be represented by the utility function, U(x1, x2)= x12+ x22. If
the price of x1 is $10 and the price of x2 is $25 and Toni has $200 to spend, what commodity
bundle will maximize Toni’s utility given her budget constraint?

Answer: x1=20 and x2=0.

Notice Toni has increasing MRS. She will be at a corner of the budget constraint.

(4) Briana's utility over X and Y can be represented by U(X,Y)=2X-lnY. Briana maximizes her
utility subject to a budget constraint. What are her uncompensated demand functions, X*(pX,
pY, I) and Y*(pX, pY, I)?

Answer: X*(pX, pY, I)=I/pX.

For Briana, Y is a bad. So she should spend ALL her money on X.

(5) TRUE or FALSE or Uncertain: Can a consumer ever be maximizing her utility subject to her
budget constraint if the "bang-for-her-buck" (her added utility from the last dollar spent on
the good) is not the same across all of the goods she consumes?

Answer: TRUE.
She could be at a corner where she consumes none of a good. Then MUx/Px does not have to equal
MUy/Py for her to be maximizing her utility subject to a budget constraint

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