Solutions_to_PS_4 - ECON W3211.002 Intermediate...

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Unformatted text preview: ECON W3211.002 Intermediate Microeconomics Problem Set 4 Due Monday, October 11, 2010 1. Perloff, Chapter 5: 30, 34, 36 30. Since pie and ice cream are complements, we may assume that she always eats them in the sam proportion, say Q p = Q c , where is a positive constant. Denote P p and P c are the prices of pie and ice cream, respectively. Let I be Olivias income. Then P p Q p + P c Q c = I P p Q p + P c Q p = I Q p ( P p + P c ) = I Thus the demand function for pie is Q p = I P p + P c and Similarly, the demand func- tion for ice cream is Q c = I P p + P c 34. Notice that | MRS | = MU C MU B = B C = 1 2 . If ( C,B ) is an equilibrium, then it must satisfy the following conditions: (1) Optimality: | MRS | = MU C MU B = P C P B . (2) Feasibility: P C C + P B B I . From the optimality, we get P C P B = 1 2 = B C , and from the feasibility, 2 B + C = 120 . Hence the equilibrium consumption bundle is ( C * ,B * ) = (60 , 30) . After tax, optimal- ity condition implies...
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This note was uploaded on 10/03/2011 for the course ECON W3211 taught by Professor Elmes during the Fall '09 term at Columbia.

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Solutions_to_PS_4 - ECON W3211.002 Intermediate...

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