ECON 410: Homework #3

Directions
1. Read the entire assignments: there are 10 multiple choice and several long form problems.
2. This assignment is due by 12:00pm on Monday, Sept. 18, 2023.
 An answer key will be posted in Canvas under Files/Assignments the next day.
 It’s your responsibility to allow enough time before submission to safeguard against
technical glitches. The latter includes making a pdf/pics of your answer sheets. This may
take time: it your responsibility to do it on time.

3. Submit your answers through Gradescope.

4. Click here for Gradescope submission instructions
(https://www.youtube.com/watch?v=j_kha2UkeMY).
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Scannable, to convert your pictures into a pdf. Apply the black and white or color filter to
your pictures to make your answers easier to see!
 Make sure each upload is right-side up and not rotated.

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Px = 10 WHEN MRT = MRS, OPTIMAL BUNDLE I = PxX + PyY
Py = 2 Y = (I - PxX) / Py
I = 30 y = 15 - 5x Multiple Choice Questions (5 points each) y = (20 - 10x)/2
y = 10 - 5x
1. Consider an individual with $30 to spend on X and Y. The price of X is $10.00. The price of Y is
Max Y = I/Py
30/2 = 15 $2.00. If the individual has a Cobb-Douglas utility function of the form 𝑈(𝑋, 𝑌) = 𝑋 / 𝑌 / ,
what is her optimal bundle? MRT = Px/Py = 10 / 2 = 5
MUx = 2/3x^-1/3 * y^1/3
a. X=0, Y=15
b. X=1, Y=10
MUy = x^2/3 * 1/3y^-2/3
c. X=1.5, Y=7.5 MRS = 2y/x
d. X=2, Y=5 2y/x = 5x (MRS = MRT)
e. X=3, Y=0 d. 2(5)/2 = 5.
2. Ashray’s preferences are represented by 𝑈(𝑇, 𝐸) = 𝑇 + 2𝐸 / , where T is toys and E is
everything else. Ashray has an income of $100, the price of a toy is $12, and the price of a unit of
“everything else” is $1. At their utility maximizing bundle, Ashray’s MRS of toys for
everything else is

a. 10
b. 1/10
c. 12
d. 1/12
e. 0

3. Lakshmi’s preferences over video games (V) and pizza (Z) are represented by the utility function
U(Z, V) = ZV + 2(Z + V). If the price of a video game is $60 and the price of a pizza is $15, find
Lakshmi’s optimal consumption bundle assuming she has a $450 budget.

a. Z=25 and V=2.

b. Z=18 and V=3
c. Z=16 and V=4
d. Z=10 and V=5
e. Z=30 and V=0

4. Consider an individual with the following preferences: 𝑈(𝑋, 𝑌) = 𝑥 / + 𝑦 / . The price of x

is $4. The price of y is $2. Which of the following bundles could be a utility maximizing bundle
for the right income?

a. x=4 and y=16

b. x=10 and y=20
c. x=48 and y=12
d. x=12 and y=6
e. x=25 and y=25

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5. Consider an individual with $500 to spend. The price of X is $25, and the price of Y is $50. The
individual’s preferences are represented by 𝑈(𝑋, 𝑌) = 𝑋 + 𝑌 . What is this individual’s optimal
bundle given her budget constraint?

a. X=0 and Y=10

b. X= 5 and Y=7.5
c. X=4 and Y=8
d. X=10 and Y=5
e. X=20 and Y=0

6. Billy’s preferences satisfy standard utility theoretic properties (more is better, etc.). He is
currently spending his entire candy budget on 20 candy bars and 30 lollipops. According to his
preferences, you can take away up to 5 candy bars if you give him 10 more lollipops without
changing his utility. The price of a candy bar is $1.50, and the price of a lollipop is $0.50. Is he
maximizing his utility given his budget constraint? If not, how should he change his consumption
bundle?

a. No, he should buy more candy bars and fewer lollipops.

b. No, he should buy more lollipops and fewer candy bars.
c. No, he should buy more lollipops and more candy bars.
d. No, he should buy fewer lollipops and fewer candy bars.
e. Yes, he is maximizing his utility.

7. A consumer has preferences for coffee and pancakes that satisfy standard utility theoretic properties
(more is better, etc.). At her current consumption bundle on the budget line, you can take away a
maximum of 3 cups of coffee if you give her 2 extra pancakes without changing her utility. The price of
a cup of coffee is $4, and the price of a pancake is $2. Which of the following is true at the current
consumption bundle, assuming you graph pancakes on the Y-axis and coffee on the X-axis?

a. The bang per buck (i.e. MU/P) is higher for pancakes than coffee, and the consumer’s
indifference curve is steeper than her budget line.
b. The bang per buck is higher for coffee than pancakes, and the consumer’s indifference curve
is steeper than her budget line.
c. The bang per buck is higher for pancakes than coffee, and the consumer’s indifference curve
is flatter than her budget line.
d. The bang per buck is higher for coffee than pancakes, and the consumer’s indifference curve
is flatter than her budget line.

8. Aisling eats turkey and bread sandwiches for lunch and regards turkey and bread as perfect
complements. For every 2 slices of bread (B), she requires exactly 3 slices of turkey (T). Aisling
has $14 to spend on bread and turkey, each slice of bread costs 50 cents, and each slice of turkey
costs 25 cents. Her utility function is ______ and her optimal bundle is ______.

a. U=min(2B,3T); 14 slices of bread and 21 slices of turkey

b. U=min(3B,2T); 14 slices of bread and 21 slices of turkey
c. U=min(2B,3T); 16 slices of bread and 24 slices of turkey
d. U=min(3B,2T); 16 slices of bread and 24 slices of turkey

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9. Kara’s preferences for ravioli (R) and tortellini (T) are described by the utility function,
𝑈(𝑅,𝑇)=5𝑅+4𝑇. Suppose Kara has $12 to spend on these pastas, and the price of a ravioli is $1.
She is willing to trade _________ raviolis for each additional tortellini, to remain as well off. She
will maximize her utility by consuming only tortellini if the price of tortellini is less than _____.

a. 4/5; $0.80
b. 4/5; $1.25
c. 5/4; $0.80
d. 5/4; $1.25
e. 5/4; $1

10. For which of the following utility functions are corner solutions not possible? (Select all that
apply.)

a. 𝑈(𝑋,𝑌) = 3X+4Y.
b. 𝑈(𝑋,𝑌) = 𝑋 / 𝑌 /
c. 𝑈(𝑋,𝑌) = 3ln(𝑋)+5𝑌
d. U(𝑋,𝑌) = 2𝑋 + 𝑌
e. U(𝑋,𝑌) = min (3𝑋,4𝑌)

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 Long Form Questions

1. (25 points) Mike’s utility function is 𝑈(𝑋,𝑌) = 𝑋 / 𝑌 / The price of X and the price of Y are
each $4. Mike’s income is $144, and he spend this income entirely on goods X and Y.

a. Mike wants to maximize his utility. Use the Lagrangian method to find his optimal bundle
and calculate his (total) utility for this bundle. (9 points)
b. Calculate, compare, and interpret Mike’s marginal utility per dollar spent on each good at his
optimal bundle. (5 points)
c. If the price of X quadruples, how will Mike’s optimal bundle change? (You are not required
to use the Lagrangian method this time.) (6 points)
d. Suppose that, after price of X quadruples, Mike still wants to maintain his original utility
level (from part a). What’s the minimum amount he would he need to earn (in income) to
choose a bundle that gives him as much utility as his bundle from part a? (5 points)

2. (25 points) Jacob’s preferences for goods X and Y can be described by U(X,Y) = X + 2Y + XY.
Jacob has an income of $20 and faces prices PX = PY = $5.

a. Derive Jacob’s utility maximizing bundle given his budget constraint. Use the Lagrange
method or simply the optimality condition. (9 points).
b. Now suppose Jacob’s income falls to $5. Redo part a. (6 points)
c. Calculate Jacob’s MRS of X for Y at this new utility maximizing bundle. How does it
compare to the market trade-off of X for Y? (3 points)
d. On one graph, depict Jacob’s utility maximizing bundles using indifference curves and
budget lines, both before and after his income decreases. (7 points)