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EC 501/Zenginobuz

Fall 2011

Problem Set #2 (Review Questions on Intermediate Consumer Theory) Due October 12, 2011 1. A consumer consumes one consumption good x and hours of leisure l. The price of the consumption good is p, and the consumer can work at a wage rate of w = 1. What is the consumers budget set? 2. Jeyda buys 3 liters of milk and 2 kilos of apples when milk sells for $2 a liter and apples sell for $1 a kilo. If Vahide buys 2 liters of milk and 3 kilos of apples at the same prices' is it TRUE or FALSE that Jale's marginal rate of substitution of milk for butter is greater than Vahide's? 3. Aliye's utility function is U(x1, x2) = 4x11/2 + x2. If the price of good 1 is 1, the price of good 2 is 2, and her income is 28, how many units of good 1 will Aliye choose? 4. Zeyna's utility function is U(x, y) = (4 ln(x1)) + x2, where x1 is her consumption of good 1 and x2 is her consumption of good 2. Given her current income and the current relative prices, she consumes 35 units of good 1 and 5 units of good 2. If her income doubles, while prices stay constant, how many units of good 1 will she consume after the change in income? 5. Hamit's utility function is U(x, y) = Min{x, 5y + 4z}, where x, y, and z are the quantities of commodities X, Y, and Z, respectively that he consumes. The price of X is 1, the price of Y is 10, and the price of Z is 3. Hamit's income is 27. How many units of X does Hamit demand? 6. Kamil has 42 M TL, which he decides to spend on commodities X and Y. Commodity X costs 13 M TL per unit and commodity Y costs 12 M TL per unit. He has the utility function U(x, y) = 3x2 + 2y2, where x is the quantity of commodity X he consumes and y is the quantity of commodity Y he consumes. How much of commodity X and how much of commodity Y will he choose to consume? 7. Mahir consumes two commodities, X and Y, and his utility function is Min{x + 2y, y + 2x}. He chooses to buy 8 units of good x and 16 units of good y. The price of good y is 0.5. What is his income?
8. With some services, e.g., phone services or pay TV, a consumer is offered a choice of two or more payment plans. One can either pay a high fixed fee and get a low price per unit of service or pay a low fixed fee and a high price per unit of service. Suppose you have an income of $100. Plan A has a fixed cost of $20 with a price of $2 per unit. Plan B has a fixed cost of $40 with a price of $1 per unit for using the service. Let x stand for expenditure on other goods and y be consumption of the service. a) Write down the budget equation that you would have after you paid the fixed cost for each of the two plans. b) If your utility function is xy, how much y would you choose in each case? c) Which plan would you prefer? Explain.

9. Baha consumes only beer and sausages. His income is $100 per week. The price of beer is $ 0.5 and the price of sausages is $1. Baha's utility function is given by U(x, y) = -[(x-50)2 + (y-40)2], where x is the number of cans of beer and y the number sausages he consumes per week. a) Draw indifference curves that will show Baha's consumption pattern. b) How many cans of beer and how many sausages will Baha choose to consume per week? c) How will his consumption bundle change if his income rises to $200 per week. 10. Mahinurs utility function is U = C + 14 D 1 2 0.5( H + J ) , where C is money spent on goods other than housecleaning, D is the number of hours per day that somebody spends cleaning her house, H is the number of hours per day Mahinur spends cleaning her house, and J is the number of hours per day Mahinur spends working at her job. All Mahinurs income comes from her job. She can work as many hours as she wishes at a wage of $7 an hour.

a) If she can not hire anyone to do her housecleaning, how many hours will she spend on the job and how many hours will she spend housecleaning? b) If she can hire a housecleaner at $5 an hour, how many hours will she work on her job, how many hours of housecleaning will she hire, and how many hours will she clean house?