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Econ_256_Problem_Set_3 - Econ 256 Intermediate...

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Econ 256 Intermediate Microeconomics Professor Ranganath Murthy Bucknell University, Summer 2005 PROBLEM SET 3 Due June 22, 2005 Make sure you use the graph paper provided in class. Your graphs should be accurate . I neglected to mention that the utility function we used in class ( FC U = ) belonged to Jane. I borrowed the problem from another textbook. Consider now, Tarzan’s utility function—a faint attempt at humor here! The utility that Tarzan receives by consuming food F and clothing C is given by the utility function FC U 2 = . (a) In Panel A, draw the indifference curves associated with the utility levels of 12, 24, and 48. Are the indifference curves strictly convex ? (b) Suppose that food costs $1 a unit, and clothing $3 a unit, i.e., P F = $1 and P C = $3. Tarzan has $12 to spend on food and clothing. Write the budget equation . In Panel A, graph the budget line that he faces, and label it B 2 . (c) What is the utility-maximizing choice of food and clothing ? Label the optimal point E 2 . (d) Suppose that food now costs $2, other things being the same.
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