ECONOMICS 3010, SEC.

A Fall 2016
UNIVERSITY OF LETHBRIDGE
DEPARTMENT OF ECONOMICS
Assignment #2
Instructor: S. Malla
Due Date: Thursday, October 13, 2016 (3:05; B650)
Part 1: True/False Questions
Indicate whether the following statements are true, false or uncertain.
Support your answer with an explanation in the form of a short paragraph, a graph or a
short proof.
1. Consider the utility function U = min(2 x, y ) . If x is on the horizontal axis, the
indifference curves for this utility function will be straight lines.
2. Suppose that a consumer has the utility function U = 3 A + 4 B which has MU A = 3
and MU B = 4 . If A is measure on the horizontal axis, the indifference curves will be
L-shaped.
3. Consider the utility function U = x 2 + 3 y which has MU x = 2 x and MU y = 3 . The
indifference curves for this utility with x on the horizontal axis will have the same
MRS X ,Y as y increases holding x constant.

Part 2: Problems [show your work & support your answer]

4. Consider the utility function U = 3 x 2 + 5 y 2 with MU x = 6 x and MU y = 10 y .
a. Is the assumption that “more is better” satisfied for both goods? Explain
b.Will the indifference curve corresponding to this utility function be negatively
sloped (or downward sloping)? Explain
c. What is the MRS x , y for this function? Explain
d. Is the MRS x , y diminishing, constant, or increasing as the consumer substitute
x for y along an indifference curve? Explain
e. Will the indifference curve corresponding to this utility function be convex to
the origin, concave to the origin, or straight lines? Explain

5. For each of the following rankings, determine whether the ranking is ordinal or
cardinal and explain why.
a. Jane prefers two sodas and one hamburger to one soda and one hamburger.
b. Fred states that, “playing baseball is ten times better than playing soccer.”

6. Olivia likes to eat both apples and bananas. At the grocery store, each apple costs
$0.20 and each banana cost $0.25. Olivia’s utility function for apples and bananas is
B A
given by U ( A, B) = 6 AB where MU A = 3 and MU B = 3 . If Olivia has $4
A B
to spend on apples and bananas, how many of each she buys to maximize her
satisfaction? Explain

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ECONOMICS 3010, SEC. A Fall 2016
UNIVERSITY OF LETHBRIDGE
DEPARTMENT OF ECONOMICS

7. At Dave’s current consumption bundle his marginal utility for hot dogs is 5 and his
marginal utility for sodas is 3. If the price of one hot dog is $1 and the price of one
soda is $0.50, is Dave currently maximizing his utility? Explain If not, how should he
reallocate his spending in order to increase his utility? Explain

8. a. At current consumption levels, Joe’s marginal utility from beer is 5 and his marginal
utility from Coke is 4. The price of a can of beer is $2 and the price of a can of Coke
is $1. Is Joe’s consumption choice at an “interior optimum”? Explain. If Joe could,
would he want to trade beer for Coke, Coke for beer, or stay at the current
consumption point? Explain

b. Suppose that beer and Coke cost the same as they did in part (a). Could Joe be
consuming optimally if, for Joe, beer and Coke are perfect substitutes with a marginal
rate of substitution constant at 2? Explain If beer and Coke were perfect substitutes
for Joe, what mix of beer and Coke would you expect to be consumed? Explain