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w4_sol - Economics 11: Microeconomic Theory 1 Professor...

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Economics 11: Microeconomic Theory 1 Professor Christian Hellwig Practice Problems Week 4 Answers 1) Joseph likes roses (R) and tulips (T) equally, and views them as perfect substitutes in proportion 1 to 1. The price of a rose is \$3, the price of a tulip is \$5, and Joseph has \$30 to expend in flowers. a) How much of each flower will Joseph buy? b) Now, suppose that the price of a rose rises to \$6. How does the consumption of Joseph change? c) What are the Joseph’s demands for roses and tulips (they must be functions of income and prices)? d) By how much should Joseph’s income increase to compensate him for the rise in the price of roses? a) His preferences can be represented by U = R + T. If roses are cheaper he will consume only roses. Therefore, R = 30/3 = 10 and T = 0. Utility is 10. b) Since tulips are now cheaper he will buy only tulips. R = 0 and T = 30/5 = 6. Utility is 6. c) There are three cases: 1) If p r < p t : R = I / p r and T = 0 2) If p r > p t : R = 0 and T = I / p

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This note was uploaded on 04/05/2009 for the course ECON 11 taught by Professor Cunningham during the Spring '08 term at UCLA.

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w4_sol - Economics 11: Microeconomic Theory 1 Professor...

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