Intermediate Microeconomics
Homework Set 3: Optimal Choice
Due 09/24 (Beginning of class)
Exercise
1
Max has utility function
u
(
x
1
,x
2
) =
x
1
(
x
2
+ 1). The price of
x
1
is $2 and the price of
x
2
is $1. Income is $10. How much
x
1
does Max demand? How much
x
2
? If his income
doubles and prices stay unchanged, will Max’s demand for both goods double?
Exercise
2
Max has a utility function
u
(
x
1
,x
2
) = 2
x
0
.
3
1
x
0
.
3
2
+ 1. The price of
x
1
and
x
2
are both $1
and Max has an income of $20.
(1) How much of each good will he demand?
(2) A tax is placed on
x
1
so that
x
1
now costs Max $2 while his income and the price
of
x
2
stay the same. How much of good
x
1
does she now demand?
(3) Would Max be as welloﬀ as he was before the tax if when the tax was imposed,
his income rose by an amount equal to $1 times the answer to part (2)
Exercise
3
Casper consumes cocoa and cheese. Cocoa is sold in an unusual way. There is only one
supplier, and the more cocoa you buy from him, the higher the price you have to pay
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This note was uploaded on 09/21/2008 for the course ECON 420k taught by Professor Clements during the Spring '07 term at University of Texas.
 Spring '07
 Clements
 Utility

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