EC207_mt1_ans

EC207_mt1_ans - The Colorado College Department of...

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1 The Colorado College Department of Economics and Business Block 7 Econ 207 Midterm 1 ans. 1. (a) (i) L = x .5 Y .5 . + λ [80 – 2x-4y] 25 . ) ( 0 2 5 . 5 . 5 . 5 . x y y x dx dL = = - = - λ (1) 125 . ) ( 0 4 5 . 5 . 5 . 5 . y x y x dy dL = = - = - (2) y x y x d dL 4 2 80 0 4 2 80 . + = = - - = (3) Equating (1) and (2), 5 . 5 . ) ( 125 . ) ( 25 . y x x y = 25 . 125 . ) ( ) ( 5 . 5 . = x y x y x y 2 1 = From (4), 80 = 2x + 4(.5x) 80 = 4x x* = 20 y* = .5(20) = 10 . (ii) U = x .5 y .5 = (20) .5 (10) .5 = 4.47(3.16) = 14.125 (b) (i) MU x = dU/dx = 1; MU y = dU/dy = 2 MRS = MU x / MU y = ½ = 0.5 (ii) 1 1 ; 2 1 = = y x y x P P MU MU ; y y x x P MU P MU < < 2 1 So, Amit gets more utility by spending \$1 from good y than from good x. So he will buy only y and none of good x. 10=1.x +1y 10= y as x=0. y = 10 x=0 His total utility = x+2y = 0+2(10) = 20.

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(iii) 2. (a) (i) Quantity of ham A B C Quantity of green eggs A to B is substitution effect. B to C is income effect.
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This homework help was uploaded on 04/19/2008 for the course EC 207 taught by Professor Ghosh during the Spring '08 term at Colorado College.

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EC207_mt1_ans - The Colorado College Department of...

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