Econ 310-1 Winter 2008 PS3 with Answers

# Econ 310-1 Winter 2008 PS3 with Answers - Economics 310-1...

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Economics 310-1 Problem Set 3 Winter 2008 1. Suppose that a consumer’s utility function is U(x,y) = ln x + ln y. Let P X = 2, P Y = 1, and I =10. Calculate the consumer’s optimal choice. 2. For Problem 2, derive the Income Consumption Curve (ICC). That is, determine the optimal consumption bundle for arbitrary I. Graph the ICC and show the optimal bundles for three levels of income. Are x and y normal or inferior goods over the range of incomes considered? 3. For Problem 1, you have already calculated the optimal consumption bundle when P X = 2, P Y = 1, and I =10. Hold all of the parameters constant except P Y . Recalculate the optimal bundle for arbitrary P Y . Graph the Price Consumption Curve (PCC) over the range of P Y from 1 to 4. 4. You now have enough information to graph the demand curve for y over the range of P Y from 1 to 4. Show the demand curve. 5. Text 5.7 6. Text 5.8 7. Auerbach’s demand for frozen custard is given by P = 20 – 2Q A while that for Kotlikoff is given by P = 40 – 2Q

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## This note was uploaded on 04/07/2008 for the course ECON 310-1 taught by Professor Schulz during the Winter '08 term at Northwestern.

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Econ 310-1 Winter 2008 PS3 with Answers - Economics 310-1...

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