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Unformatted text preview: Solution to review prelim 1 (based on the 2003 exam) Question 1. A. The function is a monotone transformation of the perfect substitutes utility function. Hence, indi f erence curves are as in f gure 1. B. The MRS = 1 . One can either f nd this directly, is MU 1 MU 2 = 9( x + y ) 9( x + y ) = 1 , or note that the MRS should be the same as that of the utility u = x + y , which is clearly MRS = 1 . Now to f nd the optimal choice note that MRS = 1 < 3 = p x p y . Therefore, the consumer would want to substitute food x for good y. The optimal choice is a corner solution x = 0 , y = m p y . Question 2 a. Under option (i) the budget is C + 10 G = 300 . G = 30 − . 1 C 300 250 200 150 100 50 40 30 20 10 C G C G Under option (ii) the budget "line" is C + 5 G = 200 for any G > , and C = 300 for G = 0 . The budget set includes all the points C + 5 G ≤ 200 as well as points with G = 0 , and 200 ≤ C ≤ 300 ....
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 Spring '06
 MASSON
 Utility, PC PD

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