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    Unit Excercise 3 - 3 4

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    indie01
    This document contains 7 practice questions covering concepts in consumer theory including: [1] Calculating the income needed to maintain consumption levels given a price change; [2] Computing marginal utility and finding consumption levels that maximize utility; [3] Identifying which consumer is not maximizing utility based on marginal utility values; [4] Explaining indifference curves, marginal rate of substitution, and the relationship between utility functions; [5] Defining a consumer's optimal choice and where it can be found; [6] Solving for marginal rate of substitution, writing a budget constraint, and finding optimal consumption levels; [7] Deriving the inverse demand function from a direct demand function.

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    Unit Excercise 3 - 3 4

    Uploaded by

    indie01
    246 views1 page
    This document contains 7 practice questions covering concepts in consumer theory including: [1] Calculating the income needed to maintain consumption levels given a price change; [2] Computing marginal utility and finding consumption levels that maximize utility; [3] Identifying which consumer is not maximizing utility based on marginal utility values; [4] Explaining indifference curves, marginal rate of substitution, and the relationship between utility functions; [5] Defining a consumer's optimal choice and where it can be found; [6] Solving for marginal rate of substitution, writing a budget constraint, and finding optimal consumption levels; [7] Deriving the inverse demand function from a direct demand function.

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    This document contains 7 practice questions covering concepts in consumer theory including: [1] Calculating the income needed to maintain consumption levels given a price change; [2] Computing marginal utility and finding consumption levels that maximize utility; [3] Identifying which consumer is not maximizing utility based on marginal utility values; [4] Explaining indifference curves, marginal rate of substitution, and the relationship between utility functions; [5] Defining a consumer's optimal choice and where it can be found; [6] Solving for marginal rate of substitution, writing a budget constraint, and finding optimal consumption levels; [7] Deriving the inverse demand function from a direct demand function.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    246 views1 page

    Unit Excercise 3 - 3 4

    Uploaded by

    indie01
    This document contains 7 practice questions covering concepts in consumer theory including: [1] Calculating the income needed to maintain consumption levels given a price change; [2] Computing marginal utility and finding consumption levels that maximize utility; [3] Identifying which consumer is not maximizing utility based on marginal utility values; [4] Explaining indifference curves, marginal rate of substitution, and the relationship between utility functions; [5] Defining a consumer's optimal choice and where it can be found; [6] Solving for marginal rate of substitution, writing a budget constraint, and finding optimal consumption levels; [7] Deriving the inverse demand function from a direct demand function.

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    of 1

    Unit 3 Sessions 3 & 4

    Show all your working!



    1. Murphy was consuming 100 units of X and 50 units of Y. The price of X rose from 2 to
    3. The price of Y remained at 4.
    a. How much would Murphy's income have to rise so that he can still exactly
    afford 100 units of X and 50 units of Y?

    2. Suppose a consumers utility derived from consuming bananas is described by the
    functionU=3X
    2
    (1/3)X
    3
    .Compute marginal utility.
    a. Make a table showing marginal utility for X from 1 to 7 units.
    b. What is the largest number of units of X this individual would ever choose to
    consume? Explain.

    3. Larry and Teri allocate their consumption between two goods: hats and bats. The price
    of hats is $4 each and the price of bats is $8 each. For Larry, the marginal utility of
    the last hat consumed was 8 and the marginal utility of the last bat was 24. For Teri
    the marginal utility of the last hat was 6 and the marginal utility of the last bat was
    12. Which consumer is not maximizing his/her utility? How can you tell? How should
    he/she change their allocation?

    4. Given the utility function u(x
    1
    , x
    2
    ) = x
    1
    , x
    2
    . Explain the significance of a utility
    function.
    a. Calculate total utility when x
    1
    = S onJ x
    2
    = 4.
    b. List 3 additional points on the indifference curve that passes through the point
    (3,4).
    c. Explain the significance of the marginal rate substitution (MRS).
    d. Calculate the MRS at the point (3,4).
    e. Given another Utility function u
    -
    (x
    1
    , x
    2
    ) = Sx
    1
    , x
    2
    -1u. Is there a relationship
    between u(x
    1
    , x
    2
    ) and u
    -
    (x
    1
    , x
    2
    )? If so, explain it.

    5. What do we mean by consumers optimal choice and where are likely to find it?

    6. Suppose a consumer has the utility function u(x
    1
    , x
    2
    ) = x
    1
    , x
    2
    2
    The price of good 1 is
    P
    1
    = S, the price of good 2 is P
    2
    = 1 and his income is $270.
    a. Solve for the consumers MRS.
    b. Write down the budget constraint. What is the slope of the budget line?
    c. . What is the consumers optimal choice of goods 1 and 2

    7. The demand equation for a good x
    1
    is x
    1
    =
    m-2P
    1
    +10P
    2
    2P
    1
    . Solve for the inverse demand
    function and explain it?

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