!"#$%"&' )**+,-#$-.

/0
123 45657 89:: 0655

;-*.&<=.+"-*: Answer each of Lhe followlng quesLlons on separaLe paper. 8e sure Lo show your work and
[usLlfy your answers wherever approprlaLe.

><$? Monday, CcLober 24
Lh
aL Lhe @$,+--+-, of class


1. Conslder Lhe followlng uLlllLy funcLlons:

! u(x, y) = xy
! u(x,y) = 6x + 3y
! u(x,y) = x
1/2
+ 2y

a. llxlng y aL 4, whaL ls Lhe marglnal uLlllLy of x when x ls 10, 20, and 30 for each uLlllLy funcLlon?
b. uo Lhese uLlllLy funcLlons exhlblL dlmlnlshlng marglnal uLlllLy of x? Lxplaln.
c. lor each uLlllLy funcLlon, calculaLe Lhe marglnal raLe of subsLlLuLlon beLween goods x and ? (ln unlLs
of ? per unlL of x) assoclaLed wlLh Lhe bundle (x, y) = (10, 4).
d. uo Lhese uLlllLy funcLlons exhlblL dlmlnlshlng marglnal raLes of subsLlLuLlon? Lxplaln.


2. !ane recelves uLlllLy from days spenL Lravellng domesLlcally (d) and days spend Lravellng ln forelgn
counLrles (f). Per uLlllLy funcLlon ls u(d, f) = 10df. She has $4000 per year Lo spend on Lravel. lL cosLs
$100 Lo spend a day Lravellng domesLlcally and $400 Lo spend a day Lravellng abroad.

a. Craph !ane's budgeL llne. 8e sote to loJlcote tbe voloes of botb tbe y-oxls ooJ x-oxls lotetcepts.
b. WhaL ls !ane's opporLunlLy cosL of a day spenL Lravellng ln forelgn counLrles (measured ln days spenL
Lravellng domesLlcally)?
c. SkeLch Lhe lndlfference curves assoclaLed wlLh uLlllLy levels of 800 and 1200. Cn each curve, be sure
Lo ploL aL leasL 3 speclflc bundles.
d. WhaL ls Lhe marglnal uLlllLy of a day spenL Lravellng domesLlcally for !ane? nlot. yoot ooswet wlll be
o fooctloo tbot JepeoJs oo tbe oombet of Joys speot ttovelloq lo fotelqo cooottles.
e. WhaL ls Lhe marglnal uLlllLy of a day spenL Lravellng ln a forelgn counLry for !ane? nete too yoot
ooswet wlll be o fooctloo.
f. lf !ane spends 8 days Lravellng domesLlcally and 8 days Lravellng abroad, whaL wlll be her marglnal
raLe of subsLlLuLlon beLween domesLlc and forelgn Lravel, expressed ln days of domesLlc Lravel per
day of forelgn Lravel (l.e. - M8S
f,d
) ? WhaL wlll lL be aL her opLlmal bundle?
g. WhaL ls Lhe uLlllLy-maxlmlzlng bundle ln !ane's budgeL seL?


3. Conslder a consumer who derlves uLlllLy from consumlng uvu's and vldeo games. Lach monLh, Lhe
consumer has an amounL, l, Lo spend on uvus and vldeo games. Lach uvu sells for
u
. Lach vldeo game
sells for
v
. 1he consumer's uLlllLy funcLlon ls u(d, v) = d(v
1/2
), %A+=A #$9-* .A9. A+* #9&,+-9: <.+:+.B
C<-=.+"-* 9&$? DE
F
G H
5I0
9-F DE
H
G J5I0KFH
L50
.

a. uerlve Lhe consumer's demand funcLlon for uvus (l.e - Lhe uLlllLy-maxlmlzlng quanLlLy of uvus
demanded, d*, as a fooctloo of lL's exogenous deLermlnanLs: l,
u
, and
v
). nlot. wltb tbls otlllty
!"#$%&'#( *+ ,'#-% *./.#* '# 0
v
.
b. Craph Lhe consumer's demand curve for uvu's (
u
ploLLed agalnsL d*) when l = $300. 8edraw Lhe
demand curve for Lhe case when l = $400.
c. Craph Lhe consumer's Lngel curve for uvu's (l ploLLed agalnsL d*) when
u
= $20/unlL. 8edraw Lhe
Lngel curve for Lhe case when
u
= $10/unlL.
d. lf l = $300,
u
= $20/unlL and
v
= $40/unlL, whaL bundle of uvu's and vldeo games wlll Lhe
consumer choose each monLh?
e. Suppose LhaL lnlLlally l = $300, and
u
= $20/unlL. lf Lhe prlce of uvus falls Lo $10/unlL, whaL wlll
happen Lo Lhe quanLlLy of uvus demanded (up or down, and by how much)?
f. WhaL wlll be Lhe subsLlLuLlon effecL (lLs magnlLude and slgn) of Lhe prlce decllne on Lhe quanLlLy of
uvus demanded? WhaL wlll be Lhe lncome effecL (lLs magnlLude and slgn) of Lhe prlce decllne on Lhe
quanLlLy of uvu's demanded?


4. Conslder a consumer LhaL spends her money on Lwo goods: x and ?. use an opLlmal cholce dlagram Lo
lllusLraLe Lhe uLlllLy-maxlmlzlng response Lo each of Lhe followlng shocks ln case boLh x and ? are normal
goods. 8e sure Lo clearly lndlcaLe ln each dlagram boLh pre-shock and posL-shock coordlnaLes for Lhe
opLlmal bundle.

a. An decrease ln Lhe prlce of good x
b. An lncrease ln Lhe prlce of good ?
c. A decrease ln lncome


3. WhaL ls Lhe dlfference beLween normal goods" and lnferlor goods"? Whlch Lype of good ls llkely Lo
have Lhe larger prlce elasLlclLy of demand, all else equal? Lxplaln. nlot. compote tbelt locome effects
wbeo ptlce cbooqes.


6. Conslder a consumer LhaL chooses a bundle of lelsure Llme (r) and a composlLe good (c) Lo maxlmlze
Lhe uLlllLy funcLlon u(c, r) = c + 16(r
1/2
), where c ls Lhe number of unlLs of Lhe composlLe good consumed,
and r ls Lhe number of hours of lelsure consumed each monLh. 1he consumer's monLhly lncome equals
hours of labor supplled (l
s
) Llmes Lhe hourly wage raLe (w). Lvery hour spenL noL sleeplng (480 hours per
monLh) ls elLher consumed as lelsure or supplled as labor, so Lhe quanLlLy of labor supplled each monLh
ls l
s
= 480 - r. Lvery dollar earned from worklng ls spenL on Lhe composlLe good. 1he wage raLe (w)
earned by Lhe consumer for each hour supplled as labor ls $10. 1he prlce of a unlL of Lhe composlLe
good (p) ls $20.

a. AL Lhese prlces, whaL ls Lhe maxlmum amounL of Lhe composlLe good LhaL Lhe consumer could
purchase each monLh? WhaL ls Lhe maxlmum amounL of lelsure Lhe consumer could consume?
b. WrlLe down Lhe equaLlon for Lhe consumer's monLhly budgeL llne, and draw lL. 8e sote to loJlcote
tbe moqoltoJe of botb tbe botlzootol-oxls ooJ vettlcol-oxls lotetcepts.
c. WhaL ls Lhe opporLunlLy cosL of an hour spenL aL lelsure, measured ln unlLs of Lhe composlLe good?
d. under Lhese condlLlons, whaL ls Lhe opLlmal bundle of lelsure and Lhe consumpLlon good? nlot. tbe
motqlool otlllty fooctloos ote Mu
c
= 1 ooJ Mu
t
= 8/(t
1/2
). WhaL ls Lhe opLlmal quanLlLy of labor
supplled?
e. Suppose Lhe consumer's wage raLe lncreases from $10/hour Lo $20/hour. WhaL ls Lhe new equaLlon
for Lhe budgeL llne? WhaL ls Lhe new (opLlmal) quanLlLy of labor supplled?
f. WhaL ls Lhe subsLlLuLlon effecL (lLs magnlLude and slgn) of Lhe wage lncrease on Lhe quanLlLy of labor
supplled? WhaL ls Lhe lncome effecL (lLs magnlLude and slgn) of Lhe wage lncrease on Lhe quanLlLy of
labor supplled?


7. WhaL does a Lyplcal shorL run marglnal producL of labor funcLlon look llke? Pow abouL a shorL run
LoLal producL funcLlon? Why?


8. Conslder Lhe followlng producLlon funcLlons:

! q = 2k + 3L
! q = 4k
1/2
L
1/2


a. Craph Lhe shorL run LoLal producL curves for each producLlon funcLlon for 0 < L < 23 ln Lhe case
where k ls flxed aL 4.
b. Craph Lhe marglnal producL of labor funcLlons for each producLlon funcLlon for 1 < L < 23.
c. uo Lhese producLlon funcLlons exhlblL dlmlnlshlng marglnal reLurns Lo labor? Lxplaln.
d. lor each producLlon funcLlon, skeLch Lhe lsoquanLs correspondlng Lo producLlon levels of 8 and 16.
8e sote to plot ot leost J polots oo eocb lsopooot.
e. lor each producLlon funcLlon, calculaLe Lhe marglnal raLe of Lechnlcal subsLlLuLlon beLween labor
and caplLal (expressed ln unlLs of caplLal per unlL of labor) aL Lhe lnpuL bundle (4,4).
f. uo Lhese producLlon funcLlons exhlblL dlmlnlshlng marglnal raLes of Lechnlcal subsLlLuLlon?
g. lor each producLlon funcLlon, deLermlne wheLher lL exhlblLs lncreaslng reLurns Lo scale, consLanL
reLurns Lo scale, or decreaslng reLurns Lo scale.


9. WhaL ls Lhe dlfference beLween dlmlnlshlng marglnal reLurns" and dlmlnlshlng LoLal reLurns"? ls lL
posslble Lo have dlmlnlshlng marglnal reLurns wlLhouL also havlng dlmlnlshlng LoLal reLurns? Lxplaln.


10. use Lhe relaLlonshlps beLween LoLal producL, average producL, and marglnal producL ln Lhe shorL run
Lo flll ouL Lhe Lable below.

M N )OM DOM
0 0
1 220
2 300 270
3
4 1100 200
3 ----


11. WhaL does lL mean for a producLlon process Lo exhlblL dlmlnlshlng marglnal reLurns" Lo all lnpuLs?
WhaL does lL mean for a producLlon process Lo exhlblL decreaslng reLurns Lo scale"? lf a producLlon
process exhlblLs dlmlnlshlng marglnal reLurns Lo each of lLs lnpuLs, wlll lL necessarlly also exhlblL
decreaslng reLurns Lo scale? Lxplaln.


12. use Lhe deflnlLlons of Lhe varlous measures of cosL Lo flll ouL Lhe followlng Lable.

N P2 PQ2 P82 )2 D2 )Q2
1 18
2 16 10
3
4 66
3 10 18
6 108


13. Conslder a flrm LhaL produces ouLpuL from caplLal and labor accordlng Lo Lhe producLlon funcLlon q =
10kL. 1he prlce of caplLal (r) ls $120 per unlL. 1he prlce of labor (w) ls $30 per unlL.

a. lf caplLal ls flxed aL 10 ln Lhe shorL run, how much labor musL be employed Lo produce 1000 unlLs of
ouLpuL ln Lhe shorL run?
b. WhaL ls Lhe LoLal cosL of produclng 1000 unlLs of ouLpuL ln Lhe shorL run? 1he average LoLal cosL?
c. lf Lhe prlce of labor lncreases from $30 per unlL Lo $40 per unlL, whaL happens Lo Lhe LoLal cosL of
produclng 1000 unlLs of ouLpuL ln Lhe shorL run (up or down, and by how much)? WhaL happens Lo
Lhe average LoLal cosL?
d. AL Lhe lnlLlal prlces, whlch bundle of lnpuLs (k, L) would enable Lhe flrm Lo produce 1000 unlLs of
ouLpuL aL Lhe lowesL cosL ln Lhe long run?
e. WhaL ls Lhe LoLal cosL of produclng 1000 unlLs of ouLpuL ln Lhe long run aL Lhe lnlLlal prlces? 1he
average LoLal cosL?
f. lf Lhe prlce of labor lncreases from $30 per unlL Lo $40 per unlL, whaL happens Lo Lhe LoLal cosL of
produclng 1000 unlLs of ouLpuL ln Lhe long run (up or down, and by how much)? WhaL happens Lo
Lhe average LoLal cosL?