Homework 2 - u XY = . Solve the UMP again. c. Are the...

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ECON 520 (2011 Fall) Kansas State University Zijun Luo Page 1 of 1 Homework Two Due Date: Monday, October 24 th , 2011 1. Suppose you have 10 hours to allocate freely every day. You can choose from working or enjoying leisure. If you work, you get 10 dollars per hour. a. Draw the budget line. b. Can the following combinations be candidates of optimality? Why or why not? i. Earn 90 dollars a day and get 4 hours of leisure ii. Earn 50 dollars a day and get 5 hours of leisure iii. Earn 60 dollars a day and get 4 hours of leisure iv. Earn 80 dollars a day and get 2 hours of leisure c. Suppose your utility is given by u SL = in which S is your total salary earned, L is the total hours of leisure you enjoyed. What is the optimum allocation of your time between working and leisure? (You should solve for Price Ratio and MRS first.) 2. Suppose 150 I = , 1 X P = , 2 Y P = , and 2 u XY = . a. Solve the UMP. b. Suppose now
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Unformatted text preview: u XY = . Solve the UMP again. c. Are the results for (a) and (b) different? Why? 3. Suppose Joseph’s income is 120 dollars per day. For simplification, assume he only consumes bread and milk. The price of bread is 2 dollars per pack and the price of milk is 4 dollars per gallon. Further, suppose Joseph cannot eat bread without milk. That is, for him to finish 1 pack of bread, he also needs 2 gallons of milk. a. Draw Joseph’s budget line and a system of at least three indifference curves. b. Find Joseph’s optimal daily consumption of bread and milk. c. Suppose now Joseph’s income is 200 dollars per day, while the price of both bread and milk are 5 dollars per unit. Use another color of pen to draw the new budget line for Joseph on the graph you created for (a). d. Find Joseph’s new optimal daily consumption of bread and milk....
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This note was uploaded on 03/29/2012 for the course ECON 101 taught by Professor Schneider during the Spring '11 term at Kansas State University.

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