Solutions to Selected Questions from Exam 1
Form A
Finley Edwards
This document contains answers to all Multiple Choice and True False Questions, as well as complete
solutions to all four problems.
Multiple Choice and True False Answers
1. B
2. D
3. A
4. C
5. C
6. D
7. D
8. B
9. D
10. A
11. D
12. E
13. C
14. A
15. C
16. D
17. B
18. B
19. FALSE
20. TRUE
Question 21
Part (a)  5 points
In each case the budget equation takes the form
p
x
x
+
p
y
y
=
m

F
where
F
is the fee associated with that
plan.
Plan A:
x
+ 2
y
= 80
Plan B:
x
+
y
= 60
Part (b)  10 points
I only asked for the optimal amount of
y
, but we’ll need
x
for part (c) so I’ll solve for both. The simplest
way to solve this part is to recognize that this is a CobbDouglas utility function with
c
= 0
.
5 and recall
that the demand function for a CobbDouglas utility function is given by
y
(
m,p
x
,p
y
) =
c
m
p
y
. This gives the
1
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Documentdesired quantities.
Plan A:
y
= 0
.
5
80
2
= 20 and
x
= 0
.
5
80
1
= 40
Plan B:
y
= 0
.
5
60
1
= 30 and
x
= 0
.
5
60
1
= 30
If you did not recognize that this was CobbDouglas utility, you would need to solve for the optimal
choice. Using the
MRS
=

p
x
p
y
condition, we have:
MRS
=

MU
x
MU
y
=

y
x
=

p
x
p
y
Solving for
x
gives
x
=
y
p
y
p
x
. Plugging this result into our budget equation gives the optimal amount of
y
.
Plan A:
Plugging
x
= 2
y
into the budget constraint we have 2
y
+ 2
y
= 80 which gives
y
= 20. This
implies that
x
= 2
*
20 = 40.
Plan B:
Plugging
x
=
y
into the budget constraint we have
y
+
y
= 60 which gives
y
= 30. This implies
that
x
=
y
= 30.
Part (c)  5 points
To choose between the two plans, we need to compare the utility under the two plans.
Plan A:
U
(40
,
20) = 40
*
20 = 800
Plan B:
U
(30
,
30) = 30
*
30 = 900
Since Plan B gives a higher utility, he would choose plan B.
I graded this part of the question based on the amount of
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '10
 JOSEPHPETRY
 p1 x1 p2, p1 x1 p1

Click to edit the document details