Problem Set 3

# Problem Set 3 - MMSS 211-1 Problem Set 3 Fall 2014 1...

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MMSS 211-1 Problem Set 3 Fall 2014 1. Suppose that a consumer’s utility function is U(x,y) = ln x + ln y. Let P X = 2, P Y = 1, and I =10. Calculate the consumer’s optimal choice. 2. For Problem 1, derive the Income Consumption Curve (ICC). That is, determine the optimal consumption bundle for arbitrary I. Graph the ICC and show the optimal bundles for three levels of income. Are x and y normal or inferior goods over the range of incomes considered? 3. For Problem 1, you have already calculated the optimal consumption bundle when P X = 2, P Y = 1, and I =10. Hold all of the parameters constant except P Y . Recalculate the optimal bundle for arbitrary P Y . Graph the Price Consumption Curve (PCC) over the range of P Y from 1 to 4. 4. You now have enough information to graph the demand curve for y over the range of P Y from 1 to 4. Show the demand curve. 5. You live in a very small town and have access to only one store that rents DVD’s. It charges \$2 per rental. Your demand curve for DVD rentals is P = 40 – 2Q, where P is the rental price per day and Q is the number of movies demanded per year.

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