econ11_08_problems1_sol

econ11_08_problems1_sol - Eco11 Fall 2008 Simon Board...

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Eco11, Fall 2008 Simon Board Economics 11: Solutions to 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 ”. Solution I won’t draw the pictures. I refer you to the lectures. (a) Preferences are represented by u ( x 1 ,x 2 ) = min { x 1 , 2 x 2 } . That is, preferences are perfect complements. (b) Preferences are represented by u ( x 1 ,x 2 ) = x 1 + x 2 . That is, preferences are perfect substi- tutes. (c) Preferences are represented by u ( x 1 ,x 2 ) = x 2 . 2. Consumption with Perfect Substitutes
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econ11_08_problems1_sol - Eco11 Fall 2008 Simon Board...

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