ECON201PS2 - WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS...

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DEPARTMENT OF ECONOMICS ECONOMICS 201-03 JOHNSON Problem Set #2 (due IN LECTURE Friday, September 19 th ) 1. Consider the following table from the Bureau of Labor Statistics concerning average expenditures by “consumer unit” for the years 2000-2001: Households With Incomes Households With Incomes b/w $20,000 and $29,999 b/w $40,000 - $49,999 Food $4196 $5671 Housing $9293 $12,268 Apparel $1441 $1872 Transportation $5404 $7911 Entertainment $1277 $1944 a. Based on this information, would we characterize U.S. consumer preferences for food as Cobb/Douglas? Why or why not? Explain with reference to the conclusions reached in lecture about the nature of optimal consumption in a Cobb/Douglas preference world. What about entertainment? 2. Mary Joe has preferences for food (X) and clothing (Y) governed by the following utility function: U (X, Y) = XY + X a. Are her preferences quasi-linear? Why or why not? Do her preferences exhibit a diminishing MRS? Sketch a few of her indifference curves and decide whether preferences are weakly or strictly (strongly) monotonic and convex. b.
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ECON201PS2 - WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS...

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