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Problem+Set+1

The document presents a problem set for ECO 201, focusing on utility functions and their properties. It includes questions on monotonic preferences, the behavior of marginal utilities for perfect substitutes, and the effects of strictly increasing functions on utility representation. Additionally, it explores the implications of specific utility functions on consumer preferences and marginal utility analysis.

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5 views1 page

Problem+Set+1

The document presents a problem set for ECO 201, focusing on utility functions and their properties. It includes questions on monotonic preferences, the behavior of marginal utilities for perfect substitutes, and the effects of strictly increasing functions on utility representation. Additionally, it explores the implications of specific utility functions on consumer preferences and marginal utility analysis.

Uploaded by

r5y8jcd426
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ECO 201 Problem Set 1

1. Which of the following utility functions represent preferences that are monotonic?

(a) u (x1 , x2 ) = 2x1 − 13

1
(b) u (x1 , x2 ) = x1 − (x2 )2

1 1
(c) u (x1 , x2 ) = 2 ln (x1 ) + 2 ln (x2 )

(d) u (x1 , x2 ) = ex1 − e−x2


√
(e) u (x1 , x2 ) = 2x1 + x2

(f) u (x1 , x2 ) = min {x1 , x2 }

2. Consider a utility function for goods that are perfect substitutes, u (x1 , x2 ) = x1 + x2 . Show that the ratio
M U1
M U2 for this utility function is constant (does not change with the amount of good 1 or good 2).

3. In class we defined a utility function u : X → R representing preferences ≿ as x ≿ y if and only if u (x) ≥ u (y).

Provide a simple argument (silly to call this a proof) that whenever a function u (x) represents some preferences

≿, the function v (x) = f (u (x)) also represents the same preferences ≿, as long as the function f is strictly

increasing.

4. Consider an arbitrary utility function u (x1 , x2 ), and consider a strictly increasing function f : R → R. Let
M U1
v (x1 , x2 ) := f (u (x1 , x2 )). Show that the ratio M U2 for the v utility function is the same as the ratio for the

u utility function. Hint: you’ll have to use the chain rule for finding the marginal utilities.

√
5. Consider the utility function u (x1 , x2 ) = x1 x2 . Find the marginal utilities for both goods. Are both

marginal utilities positive? Does the consumer have diminishing marginal utilities? What do these imply

about monotonicity and convexity of the consumer’s preferences?

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