Economics 1110: Intermediate Microeconomics

Fall 2013
Homework 1
(Due September 20th in your TA conference)
Professor: Pedro Dal B
1. Consider two utility functions l(r
1
. r
2
) and \ (r
1
. r
2
) such that l(r
1
. r
2
) =
, (\ (r
1
. r
2
)) with ,() being a strictly increasing function. Prove that both utility func-
tions represent the same preferences.
2. Mara lives in the beautiful country of Inationlandia. She earns 30 million pesos
a month. She only consumes hamburgers and buns. The price of a dozen hamburgers is
2 million pesos and the price of a dozen buns is 1 million pesos.
a. Graph her budget set with dozens of hamburgers in the x axis and dozens of buns
in the y axis.
b. What is the slope of the budget line?
c. Tiring of having to deal with too many zeros in the peso bills the government
decided to erase six zeros of every price and income. Graph her new budget set.
d. Mara likes to eat each hamburger with one bun. She doesnt like to eat hamburg-
ers or buns alone. Graph her indierence curves that go through the following points
(5,5), (10,10) and (15,15).
e. Find a utility function that represents her preferences.
f. Given her income and the prices of hamburgers and buns, what will she buy?
g. If her income is : and the prices of a dozen hamburgers and buns are j

and j

respectively, what are her demand functions?

3. The monkey Bobo likes to eat apples and bananas. While he is not sleeping he
collects apples and bananas in the forest. They are dicult to nd. He nds one apple
1
for every hour in which he is searching for apples and one banana for every hour he is
searching for bananas. He has 18 hours a day to search for fruit.
a. Draw his budget set with apples in the x axis and bananas in the y axis.
b. What is the slope of the budget line?
c. While Bobo likes both apples and bananas he is always willing to trade two apples
for one banana. Graph his indierence curves that go through (18,0) and (0,18).
d. Find a utility function that represents his preferences.
e. What is Bobo going to eat?
f. If instead he needs c hours to nd an apple and , hours to nd a banana, what
is his budget constraint?
g. What are his demand functions?
4. All the workers in a factory have the same utility function l = r
1
r
2
, earn the
same income of 10 and face the same prices j
1
= 1 and j
2
= 1.
a. What is the optimal consumption bundle for the workers? What utility do they
obtain?
b. Graph the indierence curve that goes through the optimal consumption bundle.
In the same graph draw the budget set.
c. Unfortunately for the workers there is an increase in j
1
of 100%. What is the new
j
1
? What is the new optimal consumption bundle and what utility do they obtain?
d. In the same graph as in point b, draw the indierence curve that goes through
the new optimal consumption bundle and also draw the new budget set.
e. The union leader argues that their wages should be increased so that they are able
to buy the same bundle they were buying before the increase in prices. What percentage
increase in wages is he asking for?
f. If the rm accepts the demand of the union leader, what will be the consumption
bundle and utility of the workers?
g. In the same graph as in point b, draw the indierence curve that goes through
the new optimal consumption bundle and draw the new budget set.
2
h. What is the percentage increase in wages so that workers are as happy as they
were before of the increase in j
1
?
3