Practice_set_1-Answer

Practice_set_1-Answer - maximize utility, will the marginal...

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ECO 303 Fall 2009 Recitation - Practice set 1 (Working in group is strongly encouraged. If you decide to form a group, just submit one paper with names of your group members on it) 1. Jane receives utility from days spent traveling on vacation domestically (D) and days spent traveling on vacation in a foreign country (F), as given by the utility function U(D,F) = 10DF. In addition, the price of a day spent traveling domestically is $100, the price of a day spent traveling in a foreign country is $400, and Jane’s annual travel budget is $4000. a. (20 points) Illustrate the indifference curve associated with a utility of 800 and the indifference curve associated with a utility of 1200. b. (20 points) Graph Jane’s budget line on the same graph. c. (20 points) Find Jane’s utility maximizing choice of days spent traveling domestically and days spent in a foreign country. 2. (40 points) Consumers in Georgia pay twice as much for avocados as they do for peaches. However, avocados and peaches are the same price in California. If consumers in both states
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Unformatted text preview: maximize utility, will the marginal rate of substitution of peaches for avocados be the same for consumers in both states? If not, which will be higher? Solution a. The indifference curve with a utility of 800 has the equation 10DF = 800, or D = 80/F. To plot it, find combinations of D and F that satisfy the equation (such as D = 8 and F = 10). Draw a smooth curve through the points to plot the indifference curve, which is the lower of the two on the graph to the right. The indifference curve with a utility of 1200 has the equation 10DF = 1200, or D = 120/F. Find combinations of D and F that satisfy this equation and plot the indifference curve, which is the upper curve on the graph. b. If Jane spends all of her budget on domestic travel she can afford 40 days. If she spends all of her budget on foreign travel she can afford 10 days. Her budget line is 100D + 400F = 4000, or D = 40 4F. This straight line is plotted in the graph above. c. 2....
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This note was uploaded on 03/21/2010 for the course ECO 303 taught by Professor Yunshanchan during the Fall '08 term at SUNY Stony Brook.

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Practice_set_1-Answer - maximize utility, will the marginal...

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