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Homework 2

# Homework 2 - Homework 2 Additional Questions 1 Utility and...

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Homework 2 Additional Questions: 1. Utility and Indifference Curves A. Suppose a consumers utility function is given by U(x,y)=sqrt(xy), where sqrt denotes the power (1/2) or the square root function. Plot the indifference curve for a utility level equal to 10. Plot at least 3 points on this indifference curve. B. Does this indifference curve for a utility level of 10 ever intercept the x or y axis? Do any of the indifference curves intercept the axis (excluding the indifference curve for a utility level of 0)? C. What does the slope of this indifference curve tell us? D. Does this utility function, U(x,y)= sqrt(xy), satisfy the more is better property which we expect consumer’s preferences to exhibit? 2. Consumer’s Utility Maximizing Bundle Suppose our consumer’s utility function is given by U(x,y)=sqrt(xy). Therefore, the MU x =(1/2)*sqrt(y/x) and MU y =(1/2)*sqrt(x/y). You will never have to work these marginal utilities out, they will be given. A. What is the slope of the indifference curve for a utility level of 4, at the point (x,y)=(2,8)? At the point (x,y)=(4,4)? At the point (x,y)=(8,2)? Why do we see this pattern in the slope as we move along this indifference curve from the left to right? B. Suppose the prices of good x and y are equal to 1 and 2 respectively. What is the slope of this consumer’s budget line (with x on the horizontal axis, y on the vertical axis)? C.

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Homework 2 - Homework 2 Additional Questions 1 Utility and...

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