Ch 3 Practice

Eco 204 s ajaz hussain do not distribute first now

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Unformatted text preview: have monotone preferences. (b) Calculate the slope of the indifference curves directly from the equation of an indifference curve. Show all calculations. Answer The utility function is: Along an indifference curve, utility is fixed at and the equation of an indifference curve is: 45 ECO 204 Chapter 3: Practice Problems & Solutions for Utility Maximization in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. So, the slope of the indifference curve is: 2/3 (c) Calculate and interpret the slope of the indifference curves from the formula Show all calculations. Answer The is the slope of an indifference curve: This is the same answer as above. Suppose the consumer is consuming a bundle : then the is the amount of good 2 that a consumer will give up in exchange for a unit of good 1 and remain indifferent to the initial bundle. (3.19) Suppose a consumer has a Cobb-Douglas utility function defined on the consumption set: { }. (a) What can be said about the parameters of the Cobb-Douglas utility function and how the consumer perceives goods 1 and 2 if the direction of increasing utility is: Q2 Consumption Set Q1 Answer The Cobb-Douglas utility function is: Clearly, the consumer thinks good 1 is a “bad” good and is “neutral” to good 2. Thus: 46 ECO 204 Chapter 3: Practice Problems & Solutions for Utility Maximization in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. For in this case, for positive bundles: (b) What can be said about the parameters of the Cobb-Douglas utility function and how the consumer perceives goods 1 and 2 if the direction of increasing utility is: Consumption Set Answer The Cobb-Douglas utility function is: Clearly, the consumer thinks good 2 is a “bad” good and is “neutral” to good 1. Thus: 47 ECO 204 Chapter 3: Practice Problems & Solutions for Utility Maximization in ECO 204 (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. For in this case, for positive bundles: 48 ECO 204 Chapter 3: Practice Problems & Solutions for Utility Maximization in ECO 204 (this version 2012-2013)...
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This note was uploaded on 03/20/2014 for the course ECON 204 taught by Professor Ajazhussain during the Fall '09 term at University of Toronto.

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