Practice Problems Set 2
True or False:
1.
If the consumer has a perfect complements utility function, then the
substitution e/ect is always zero.
2.
A Gi/en good is one whose demand curve may be upward sloping for
some price range.
3.
Without knowing the consumer°s preferences we cannot say for the
sure that the demand curve is always upward sloping.
Problem Solving:
1.Percy consumes cake and ale.
His demand function for cakes is q
c
=
m
°
30
p
c
+ 20
p
a
;
where
m
is his income
p
a
is the price of ale,
p
c
is the price
of cakes, and q
c
, is his consumption of cakes. Percy°s income is $100, and the
price of ale is $1 per unit.
a) Is ale a substitute for cakes? Explain.
b) At what price would Percy buy 30 cakes?
2. Mary°s utility function is
U
(
b; c
) =
b
+ 100
c
°
c
2
, where
b
is the number
of silver bells in her garden and
c
is the number of cockle shells. She has 500
square feet in her garden to allocate between silver bells and cockle shells. Silver
bells each take up 1 square foot and cockle shells each take up 4 sqaure feet.
She gets both kinds of seeds for free.
a) To maximize her utility, given the size of her garden, how many silver
bells should Mary plant? How many cockle shells should she plant?
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 Spring '08
 JustinMarion
 Supply And Demand, Utility, Percy, cockle shells, silver bells

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