Unformatted text preview: vertical of horizontal, depending which axis is used for courses). 5. U(X,Z) = AX 1/2 Z 1/2 . Role of A? No role at all. That is what ordinal means. 6. U(X,Z) = AX 1/2 Z 1/2 . P x =P z . A plays no role. Shares are 50%. Indifference curves are symmetric about 45degree line. Budget has slope 1. X and Z are just interchangeable. 7. U(X,Z) = X 1/2 Z 1/2 ; P x = 2 and P z = 4; Y = 100. Budget constraint? 100 = 2X + 4Z. Maximum X? Y/P x = 50. 8. U(X,Z) = X 1/2 Z 1/2 ; P x = 2 and P z = 4; Y = 100. Consumption of X and Z? Z = 25 – 0.5X. [(∂U/∂X)/(∂U/∂Z)] = 2/4 = 0.5. [(0.5)X1/2 Z 1/2 ]/[(0.5)X 1/2 Z1/2 ] = Z/X = 0.5 Z = 0.5X 100 = 2X + 4(0.5)X => X =25. Expenditure shares must be equal to 0.5. Therefore, 2X=4Z=100, X = 25 and Z = 12.5....
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 Fall '08
 CONSTANTINE
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