Answer Key - Problem Set 2

Answer Key- - Prof Akbulut Answer Key Problem Set 2(10 points 1(2 pts Nicholson Ch 4 Problem 4.2 I'll use a simpler notation for this problem Uf c

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Prof. Akbulut Answer Key - Problem Set 2 (10 points) 1. (2 pts.) Nicholson Ch. 4, Problem 4.2 I’ll use a simpler notation for this problem: U f , c f 2/3 c 1/3 a. Lagrangian: £ f 2/3 c 1/3 300 20 f 4 c £/ f 2 3 c f 1/3 20 0 £/ c 1 3 f c 2/3 4 0 £/ 300 20 f 4 c 0 From first 2 FOCs: 2 c f 5 hence 2 c 5 f . From budget contraint: 30 f 300 hence f 10 , c 25. b. f 20 c 25 This person always spends 2/3 of income on f and 1/3 on c . Consumption of California wine does not change when price of French wine changes. 2/3 of 300 200 If price of f 10 you will buy 20 f. c. In part a, U f , c f 2/3 c 1/3 10 2/3 25 1/3 13.5 . In part b, U f , c 20 2/3 25 1/3 21.5 . To achieve the part b utility with part a prices, this person will need more income. Notice: c 1 3 I P c f 2 3 I P f Indirect utility: 21.5 2 3 I P f 2 3 1 3 I P c 1 3 I 2 3 P f 2 3 1 3 P c 1 3 I 1 30 2 3 1 12 1 3 I 475.24 If we would compensate her (increase her income) by 175.24, she would again get a utility of 21.5.
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2. (2 pts.) Nicholson Ch. 4, Problem 4.4 U x , y x 2 y 2 0.5 Maximizing U 2 in will also maximize U . a.
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This note was uploaded on 04/07/2008 for the course ECON 102 taught by Professor Akbulut during the Spring '08 term at Claremont.

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Answer Key- - Prof Akbulut Answer Key Problem Set 2(10 points 1(2 pts Nicholson Ch 4 Problem 4.2 I'll use a simpler notation for this problem Uf c

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