THE UNIVERSITY OF BRITISH COLUMBIAManagerial Econ: Class 14Pre-Midterm Review1.Utility Maximization2.Perfectly Competitive Markets3.Two-Part Pricing4.Bundling5.Cournot Oligopoly6.Additional CommentsMuch of today’s review will be based on the posted review questions.THE UNIVERSITY OF BRITISH COLUMBIAAnnouncementsMidterm 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 COLUMBIA1. Utility Maximization2 of 41. Sally consumes two goods, X and Y. Her utility function is given by U =3XY2. 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. MUx/Px= MUy/PyMUx= dU/dX = 3Y2.MUy=dU/dY = 6XYTherefore 3Y2/10 = 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 = 16.67THE UNIVERSITY OF BRITISH COLUMBIAClicker Question 12 of 4Suppose Lisa has utility function U = XY1/2. 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.