Chapter 3 Key

# Chapter 3 Key - Chapter 3 Homework Key 1 Consider the...

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Chapter 3 Homework Key Due: February 20, 2007 1. Consider the utility function x y ) y , x ( U = with x 2 / y MU x = and x MU y = . a. Does the consumer believe more is better for each good? Explain. Since U increases whenever x or y increases, more of each good is better. This is also confirmed by noting that MU x and MU y are both positive for any positive values of x and y . b. Do the consumer’s preferences exhibit a diminishing marginal utility of x? Explain. Is the marginal utility of y diminishing? Explain. Since 2 y x x MU = , as x increases (holding y constant), x MU falls. Therefore the marginal utility of x is diminishing. However, y MU x = . As y increases, MU y does not change. Therefore the preferences exhibit a constant, not diminishing, marginal utility of y . 2. The utility that Julie receives by consuming food F and clothing C is given by FC ) C , F ( U = . For this utility function, the marginal utilities are C MU F = and F MU C = . a. On a graph with F on the horizontal axis and C on the vertical axis, draw indifference curves for U = 12, U = 18 and U = 24. 0 2 4 6 8 10 12 14 0 5 10 15 Food Clothing

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b. Do the shapes of these indifference curves suggest Julie has a diminishing marginal rate of substitution of food for clothing? Explain. Yes, since the indifference curves are convex toward the origin we know that
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Chapter 3 Key - Chapter 3 Homework Key 1 Consider the...

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