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REVIEW QUESTIONS
1.
George’s and Fred’s utility functions over goods 1 and 2 are given by:
U
G
(x
1
, x
2
)= 3x
1
+ x
2
U
F
(x
1
, x
2
)= 9x
1
+ 4x
2
,
respectively. Is it reasonable to say that Fred likes good 1 more than George does?
Explain and discuss.
2.
Give an example of a utility function U(x
1
, x
2
) with demand functions x
1
*(p
1
,p
2
,I) and
x
2
*(p
1
,p
2
,I) that satisfies x
1
*(6,3,540)=90 and x
2
*(6,3,540)=0 such that
neither x
1
nor x
2
is a bad
.
3.
Individuals in Minsk consume only potatoes and caviar, x
p
and x
c
. Suppose potatoes
are a Giffen good. Draw a graph with 3 budget lines and 2 indifference curves
showing the income and substitution effects of a decrease in the price of potatoes, p
p
on the consumption potatoes, x
p
. For this graph to work, is
caviar
an inferior good or
is it normal? Explain
4.
My crossprice elasticity for consumption of bagels with respect to the price of cream
cheese is .2. Presently I consume 10 bagels a week and the price of cream cheese is
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 Spring '07
 Babcock
 Utility

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