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(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 20122013) 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 CobbDouglas utility function defined on the consumption set:
{
}.
(a) What can be said about the parameters of the CobbDouglas utility function and how the consumer perceives goods
1 and 2 if the direction of increasing utility is: Q2
Consumption Set Q1 Answer
The CobbDouglas 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 20122013) 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 CobbDouglas utility function and how the consumer perceives goods
1 and 2 if the direction of increasing utility is: Consumption Set Answer
The CobbDouglas 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 20122013) 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 20122013)...
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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.
 Fall '09
 AJAZHUSSAIN
 Microeconomics, Utility

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