PROBLEM SET 2
1. John spends all of income on beer and chocolate. When the price of beer and
chocolate are 10 and 20, respectively, he consumes 50 units of beer and 25 units of
chocolate. Suppose now that both prices are 10, and his
PROBLEM SET 3
1. Suppose that a consumers utility function is given by u(x,y)=8(lnx+lny)+67. Assume that the price
of y is 1, and the consumers income is 12.
a) Find the demand function for x.
b) Find the quantity of x demanded when
Answers to Problem Set 2
His income before was p p B pc C 10 50 20 25 1000
New budget line: 10B 10C 750
Old budget: 10B 20C 1000
a) John is at least as well off. Before he consumed 50 units of beer and 25 un
Answers to Problem Set 3
1. a) U ( X , Y ) ln X ln Y . Denote p X p , so the budget constraint becomes
pX Y 12 .
Setting the marginal rate of substitution equal to the price ratio, we get
p Y pX , which we can substitute i
PROBLEM SET 1
1. Suppose that Delilah is completely indifferent between drinking Coke and Pepsi, that
is, as long as it is cola she does not care about its brand. Her preferences also satisfy
our usual assumptions. (She spends all h
Answers to Problem Set 1
a) She will spend all of her income on the cheaper good. If the prices are the same, then
she can allocate all her income between Coke and Pepsi in any possible way; she doesnt
care how much of each she consumes.
(Due date: Nov.2)
Part 1: TRUE-FALSE (2 points*15)
At a boundary optimum, a consumers indifference curve must be tangent to her budget line.
Sharon spends all of her income on peaches and strawberries. Peaches are a normal good for