ECO204 YTut 2
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bowwler123123ECO204 YTut 2
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bowwler123123ECO204Y-2022/23
Tutorial #2
#1 Serena likes eating fish, but she only eats two kinds: trout (good 1) and salmon (good 2).
Given a choice between two bundles containing trout and salmon, she always prefers the bundle
that weighs more. Let x1 represent pounds of trout and x2 pounds of salmon, respectively.
a) What is Serena’s preference ordering over the following six bundles (10,15), (20,30),
(25,0), (15,15), (20,15) and (40,10).
b) Serena is indifferent between any two bundles in which the combined weight of trout and
salmon is 10 pounds. The indifference curve for such bundles is 10=x1+x2 where x1 is
pounds of trout and x2 is pounds of salmon. What is Serena’s MRS for any bundle on this
indifference curve?
c) Graph Serena’s indifference curve for the case described in b). On your graph shade in
the area of bundles that are strictly preferred to bundles in which the combined weight of
fish is 10.
d) Serena’s utility function actually takes the form U(x1,x2)= x1+x2 . Show that the utility
numbers this function assigns to the bundles (10,15), (20,30), (25,0), (15,15), (20,15) and
(40,10) accurately reflect her preference ordering.
e) Suppose that Health Canada, concerned about low levels of salmon consumption, starts
an information campaign advocating for the nutritional benefits of salmon. As a result,
Serena’s preferences change such that she now believes salmon is twice as valuable as
trout. Write down an indifference curve for Serena’s new preferences and show her MRS
is ½.
f) Suppose that Serena’s cousin Arno preferences are such that he prefers consuming trout
and salmon together. For each additional pound of trout, he only enjoys the bundle if it
has at least one additional pound of salmon. What is Arno’s preference ordering over the
six bundles in a)?
g) Arno’s utility function actually takes the form U(x1,x2)= min[x1,x2]. Show that the utility
numbers this function assigns to the bundles (10,15), (20,30), (25,0), (15,15), (20,15) and
(40,10) accurately reflect his preference ordering.
#2 There are two goods in the world, gold, G, and silver, S. Provide a description of the
preferences represented by the following utility functions. In each case, provide an expression
for the Marginal Rate of Substitution, and sketch a representative Indifference curve.
a) U(G, S) = min[0.5 G, 2 S]
b) U(G, S) = 2 G + 5 S
c) U(G, S) = G
d) U(G, S) = 2 G - 4 S
e) U(G, S) = G½S½
f) U(G, S) = G*3S
#3 So far the utility functions we have discussed do not appear to address the fact
that people need subsistence amounts of certain goods to live—that is a person’s
utility maximizing choice may not contain enough of these goods to live on. A
simple modification of the Cobb Douglas, called the Stone Geary utility function,
can address this criticism: 𝑈(𝑥! , 𝑥" ) = (𝑥! − 𝛾! )# (𝑥" − 𝛾" )$ where 𝛾!
and 𝛾" are subsistence levels of 𝑥! and 𝑥" , and 𝑎 + 𝑏 = 1. What this means is that the individual
must consume at least, e.g., 𝛾! units of 𝑥! to get any positive utility from its consumption.
These sorts of utility functions are also sometimes used to describe additive goods.
a) What is the MRS for this utility function?
b) Consider the comparable Cobb-Douglas utility function when 𝛾! = 0 and 𝛾" = 0. Is the
Stone-Geary a monotonic transformation of this utility function? Why or why not?
c) Suppose 𝑏 = 1/2, 𝛾! = 4 and 𝛾" = 2. Compare the values of the MRS for the Stone
Geary Utility function versus the comparable Cobb-Douglas utility function from part (b)
at the point (8,8). How are they different? How does this make sense?
#4. Consider the utility functions 𝑈(𝑥! , 𝑥" ) = 6 ln 𝑥! + 𝑥" and 𝑈(𝑥! , 𝑥" ) = √𝑥" + 𝑥"
a) What kind of preferences do these utility functions represent? What is the MRS of each
utility function?
b) Are these utility functions monotonic transformations of each other?
c) Compare the two MRSs. Is there a pattern that you could associate with this type of
preferences?