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e360_apape_hw2

e360_apape_hw2 - Economics 360 Microeconomic Theory...

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1 Economics 360: Microeconomic Theory Binghamton University Department of Economics Fall, 2008 Homework #2 1. Suppose that an electric company charges consumers 10 cents per kilowatt hour for electricity for the first 1,000 used in a month but 15 cents for each extra kilowatt hour after that. Draw the budget constraint for a consumer facing this price schedule and discuss why many individuals may choose to consume exactly 1,000 kilowatt hours. 2. Paul Video derives utility only from CDs (C) and DVDs (D). His utility function is: u(C,D) = (CD) 1/2 a. Sketch Paul’s indifference curves for u = 5, u = 10, and u = 20. b. Suppose Paul has \$200 to spend and that CDs cost \$5 and DVDs cost \$20. Draw Paul’s budget constraint on the same graph as his indifference curves. c. Suppose Paul spends all of his income on DVDs. How many can he buy and what is his utility? d. Show that Paul’s income will not permit him to reach the u = 20 indifference curve. e. If Paul buys 5 DVDs, how many CDs can he buy? What is his utility?

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