PS 4 Sol - Suggested Homework solution ;Ch.4 Woo Jin Choi...

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Suggested Homework solution ;Ch.4 Woo Jin Choi [email protected] 1. Each week, Bill, Mary and Jane select the quantity of two goods, x1, and x2 , that they will consume in order to maximize their respective utilities. They each spend their entire weekly income on these two goods. a. Suppose you are given the following information about the choices that Bill makes over a three-week period: x 1 x 2 P 1 P 2 I Week 1 10 20 2 1 40 Week 2 7 19 3 1 40 Week 3 8 31 3 1 55 Did Bill’s utility increase or decrease between week 1 and week 2? Explain using a graph to support your answer As consumption of both goods increases, the utility level of week 2 is higher than week1. From the graph illustrated above, we can see that indifference curve l1 is located northeast of l2. Between week1 and week3, we can see w1 point is below week3’s budget constraint. So I1 also lies northeast of I3 , and utility level becomes larger. That is, utility increase from week1 to wee3. b. Now consider the following information about the choices that Mary makes: x 1 x 2 P 1 P 2 I Week 1 10 20 2 1 40 Week 2 6 14 2 2 40 Week 3 20 10 2 2 60 Did Mary’s utility increase or decrease between week1 and week3? Does Mary consider both goods to be normal goods? Explain. Notice that the choice made by Jane on week 1 is still affordable on week 3. Since Jane chooses something else it must be that she is better off. Therefore, her utility increases. Comparing week2 and week3, we have income increase by 20. Consequently, x1 increase by 14, and x2
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This note was uploaded on 07/13/2008 for the course ECON 101 taught by Professor Hansen during the Spring '07 term at Wisconsin.

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PS 4 Sol - Suggested Homework solution ;Ch.4 Woo Jin Choi...

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