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Class 14-2010-Review

# Class 14-2010-Review - Managerial Econ Class 14 Pre-Midterm...

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THE UNIVERSITY OF BRITISH COLUMBIA Managerial Econ: Class 14 Pre-Midterm Review 1. Utility Maximization 2. Perfectly Competitive Markets 3. Two-Part Pricing 4. Bundling 5. Cournot Oligopoly 6. Additional Comments Much of today’s review will be based on the posted review questions. THE UNIVERSITY OF BRITISH COLUMBIA Announcements Midterm Exam on Wednesday, Oct. 27 at 6:30 pm (to 8:30). If your last name begins with letters A – H go to Woodward 1. If your last name begins with letters I – Q go to Woodward 4. If your last name begins with letters R – Z go to Woodward 6. No class on Thursday.

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THE UNIVERSITY OF BRITISH COLUMBIA 1. Utility Maximization 2 of 4 1. Sally consumes two goods, X and Y. Her utility function is given by U =3XY 2 . The current market price for X is \$10, while the market price for Y is \$5. Sally's current income is \$500. Determine the X, Y combination which maximizes Sally's utility, given her budget constraint. Draw the diagram. Recall that to maximize utility MRS = price ratio. This is equivalent to saying that the marginal utility per dollar must be the same for each good consumed. MU x /P x = MU y /P y MU x = dU/dX = 3Y 2 . MU y =dU/dY = 6XY Therefore 3Y 2 /10 = 6XY/5 or 3Y/6X = 10/5 or Y/2X = 2 or Y = 4X. Also, from the budget line, 10X + 5Y = 500 so 10X + 5(4X) = 500 or 30X = 500. It follows that X = 50/3 = 16.67 THE UNIVERSITY OF BRITISH COLUMBIA Clicker Question 1 2 of 4 Suppose Lisa has utility function U = XY 1/2 . The price of X is 5 and the price of Y is 1. Lisa maximizes utility. a.Lisa will consume more than twice as much X as Y. b.Lisa will consume more X than Y but less than twice as much. c.Lisa will consume more Y than X but less than twice as much. d.Lisa will consume more than twice as much Y as X. e.There is not enough information to determine the relative amounts of the two goods Lisa will consume.