econ11_08_problems1

econ11_08_problems1 - Eco11, Fall 2008 Simon Board...

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Eco11, Fall 2008 Simon Board Economics 11: Practice Problems 1 (Week 2) 29 September, 2008 1. Utility Functions Define the utility functions and draw the indifference curves for each of the following cases: a) “Every time I consume one unit of x 1 , I want to consume 2 units of x 2 ”. b) “If the price of x 1 is bigger than the price of x 2 , I will only consume x 2 . If the price of x 2 is bigger than the price of x 1 , I will only consume x 1 ”. c) “I don’t care about the prices of x 1 and x 2 , I only want to consume x 2 ”. 2. Consumption with Perfect Substitutes Suppose John views butter and margarine as perfectly substitutable in the ratio of one to one for each other. a) Draw a set of indifference curves that describes Johns preferences for butter and margarine. b) If butter costs $2 per package, while margarine cost only $1, and John has a $20 budget to spend for the month, which butter-margarine combination will he choose? (c) Can you show this graphically? What happens when the price of margarine increases to $3?
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econ11_08_problems1 - Eco11, Fall 2008 Simon Board...

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