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Unformatted text preview: Solutions Homework Assignment 2 Econ 150b Intermediate Microeconomics 1 The budget constraint is p 1 x 1 + p 2 x 2 = m (in this case, it is x 1 + x 2 = 1000). The utility maximizing bundle can be found by equating the MRS to the price ratio αx 2 (1 α ) x 1 = 1, and the demands are: x 1 = mα ; x 2 = m (1 α ) In other words, x 1 = 1000 α ; x 2 = 1000(1 α ). 2 The answer comes directly from the previous part: x 1 = 1100 α ; x 2 = 1100(1 α ) The demand increases proportionally by 10%. 3 The constraint can be written as: x 2 = m if 0 ≤ x 1 < 100 m ( x 1 100) if 100 ≤ x 1 < 1100 otherwise Of course, m = 1000 here. The first line of this constraint is worth examining. The only way the agent can consume less than 100 units of food is to throw away some of the food that has been provided as part of the inkind transfer. The remaining income of 1000 can be spent on x 2 ....
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This note was uploaded on 04/11/2008 for the course ECON 150 taught by Professor Eduardofaingold during the Spring '08 term at Yale.
 Spring '08
 EduardoFaingold
 Microeconomics, Utility

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