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Skelton
Eco 3301
Homework 3
1.
The utility Martha Stewart derives from her purchase of bowls and stock tips is represented
by the equation U(b,s) = b
0.75
s
0.25
, so that MU
b
= 0.75*b
0.25
s
0.25
and MU
s
= 0.25*s
0.75
b
0.75
.
A) What equation describes Martha’s demand for stock tips? This should state her demand
for stock tips as a function of the price of stock tips for any possible income level.
Similarly, determine the equation for her demand for bowls. (6 pts)
B)Suppose Martha earns income of $800, the price of bowls is $10, and the price of stock
tips is $40.
What combination of bowls and stock tips maximizes her utility?
Show this
using a budget line and indifference curves. (5 pts)
C)Suppose the price of bowls rises to $20; what is the new utility maximum combination of
goods?
Draw the graph of Martha’s demand curve. (3 pts)
D)Show that a decrease in income to $480 (perhaps resulting from a jail term) will shift
Martha’s demand curve. (3 pts)
E) Use your calculation from part D to construct an Engel curve for Martha. (2 pts)
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 Spring '08
 Skelton
 Utility

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