e360_apks_hw2_solns

# e360_apks_hw2_solns - HW2 Answer Key 1 Andreas Pape Kai Sun...

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HW2 Answer Key Andreas Pape, Kai Sun 1. Suppose you have W=\$1000; “e” stands for electricity and “x” stands for everything else. “P ” stands for the price of x and let P =1. x x You spend 1000kwh*0.1\$/kwh=\$100 for the first 1000 kilowatt hour s . Then you have \$900 left. Since P x =1, you can buy 900 unit s of x. Otherwise, you could use the \$900 to buy the electricity of 900/0.15=6000kwh. The following is the budget line: U 7000 1000 1000 900 kink e x According to the above kinked budget line, the indifference curve is very likely to be “tangent” at the kinked point. At this point, the individual chooses to consume exactly 1000 kilowatt hours. 1

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HW2 Answer Key Andreas Pape, Kai Sun 2. a. c. 200/20=10 He can buy 10 DVDs. Since he doesn’t buy any CDs, i.e. 0 CD, his utility is U(0, 10)=0 d. See graph. e. 20*5+5*C=200 => C=20 U(20,5)=(20*5) 1/2 =10 f. We want to show that at point (C,D)=(20,5), he expends all wealth and MRS=Price ratio. 1/2 1/2 , 1/2 1/2 1 ** 51 2 1 20 4 2 CD U DC D C MRS U C D == = = = Budget Line 40 C 10 5 20 U=10 D 20 5 U=20 10 U=5 2
HW2 Answer Key Andreas Pape, Kai Sun 51 20 4 C D P P == , C CD D P MRS P = . Now we can see that (C,D)=(20,5) is also on the budget line since 5*20+20*5=200. Therefore, we can say that the utility calculated in part e is the highest he can achieve with an income of \$200. 3

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HW2 Answer Key Andreas Pape, Kai Sun 3.
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e360_apks_hw2_solns - HW2 Answer Key 1 Andreas Pape Kai Sun...

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