aps2x313_f05

# aps2x313_f05 - would you tell her ANS Take the comm class...

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1) Goodheart gives two midterms in his communications class. He only uses the higher of the two. Let x = score on midterm 1 and let y = score on midterm 2. a) Nancy Lerner has \$450 to allocate and \$Px = \$Py = \$5. What midterm grades bundle in communications will maximize Nancy’s utility subject to her budget constraint? ANS: She should spend all her money studying for one test or the other. Doesn’t matter which one, as long as it is one corner or the other. She would get a score of 90, then. b) Professor Stern gives two midterms. Instead of discarding the lower grade, Professor Stern discards the higher one. Again, let x = score on midterm 1 and let y = score on midterm 2 and assume \$Px = \$Py = \$5. What midterm grades bundle in economics will maximize Nancy’s utility subject to her budget constraint? ANS: In Econ, she should split her time and get a 45 on each prelim, so her final score is 45. c) If you were giving Nancy advice on what class to take, econ or communications, what
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Unformatted text preview: would you tell her? ANS: Take the comm class and you’ll end up with a higher GPA! 2) Suppose that Max has the utility function u(x, y) = x(y + 1). The price of x is \$2 and the price of y is \$1. Income is \$10. How much x does Max demand? How much y? If his income doubles and prices stay unchanged, will Max's demand for both goods double? ANS: ERS = Px/Py = 2. MRS = MUx/MUy = (y+1)/x. Now set MRS = ERS and get (y + 1)/x = 2. The budget constraint is 2x + 1y = 10. Solve these two equations simultaneously to find that x = 11/4 and y = 9/2. If his income doubles and prices stay unchanged, his demand for both goods does not double. A quick way to see this is to note that if quantities of both goods doubled, the MRS would not stay the same and hence would not equal the price ratio, which has stayed constant. Econ 313.1 - Wissink - Fall 2005 PS#2 – XtraQ - ANSWERS 90 x y comm ICcomm BLcomm 90 45 x y 45 econ ICecon BLecon 90 90...
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## This note was uploaded on 10/29/2009 for the course ECON 3130 taught by Professor Masson during the Fall '06 term at Cornell.

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