ps3_101_2011 - Economics 101 Problem Set 3 Due Thursday...

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Economics 101 Problem Set 3 Due Thursday, February 3, 2011 George J. Mailath Please indicate your recitation time/number and recitation instructor on your answer. 1. Nicholson and Snyder problem 4.2. 2. Suppose Bruce enjoys opera, and while at the opera, champagne. Not surprisingly, better seats at the opera cost more. For simplicity, sup- pose that all qualities of seats are available, with q denoting the quality of a seat. His utility function is quasilinear, of the form U ( q,c ) = log q + c, where c is his consumption of champagne. (a) If the opera charges a constant price p o per unit quality (so that a ticket of quality q costs p o q ), and champagne costs p c per (very small) glass, what is Bruce’s budget constraint (if he has I to spend)? (b) Illustrate Bruce’s budget constraint and indifference curves. (c) Suppose p o = p c = 2 and I = 3. Which ticket will Bruce buy, and how much champagne will he drink? (d) How do Bruce’s optimal choices change as his income I increases?
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