problemset2 - Middle East Technical University Department...

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Middle East Technical University Spring 2011 Department of Economics ECON 201 Erol Çakmak TA: Osman Değer PROBLEM SET #2 1. There are two goods in the world: cigars (C) and whisky (W). Draw a few indifference curves to represent the following preferences for the two goods. Then state which type of preferences each one represents, and write a sentence or two to explain your drawing. a) I like cigars, but I hate whisky. b) I am always willing to give up one cigar to get one glass of whisky. c) I only like to have two cigars with a glass of whisky. I never like them apart. d) I like whisky, but I don t care about cigars at all. 2. (Perloff, p.92 q.30) What happens to a consumer’s optimal choice of goods if all prices and income double? (Hint:What happens to intercepts of the budget constraint?) 3. Mr. A is very particular about his martinis: He only enjoys them made in the exact proportion of two parts gin ( x ) to five parts vermouth ( y ). Write down a representative utility function for Mr. A and graph his indifference curves for various levels of utility. Show that regardless of the prices of the two ingredients, Mr. A will never alter the way he mixes martinis. 4. Eli
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This note was uploaded on 03/22/2012 for the course ECON 201 taught by Professor Çakmak during the Fall '10 term at Middle East Technical University.

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problemset2 - Middle East Technical University Department...

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