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Microeconomics Utility and Demand Analysis

This document contains 8 problems related to consumer theory and demand. Problem 1 asks to calculate the optimal consumption basket given prices and income, and the income and substitution effects of a price change. Problem 2 asks why consumers will buy less of a good if the price rises even if income rises. Problems 3-4 ask to draw price-consumption and income-consumption curves for substitute and complementary goods. Problems 5-6 ask to illustrate choices using indifference curves and budget lines, and derive a demand curve. Problems 7-8 ask to illustrate the income and substitution effects of a price change on a graph, and calculate the necessary change in another price to maintain the same utility level.

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Nupur Kasliwal
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120 views2 pages

Microeconomics Utility and Demand Analysis

This document contains 8 problems related to consumer theory and demand. Problem 1 asks to calculate the optimal consumption basket given prices and income, and the income and substitution effects of a price change. Problem 2 asks why consumers will buy less of a good if the price rises even if income rises. Problems 3-4 ask to draw price-consumption and income-consumption curves for substitute and complementary goods. Problems 5-6 ask to illustrate choices using indifference curves and budget lines, and derive a demand curve. Problems 7-8 ask to illustrate the income and substitution effects of a price change on a graph, and calculate the necessary change in another price to maintain the same utility level.

Uploaded by

Nupur Kasliwal
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

ME Problem Set-II

PGP 2021 - 23

1. Your preferences over pizza (x) and other goods (y) are given by U(x, y) = xy, with
associated marginal utilities MUx = y and MUy = x. Your income is $120.
a) Calculate your optimal basket when Px = 4 and Py = 1.
b) Calculate h income and substitution effects of a decrease in the price of food to $3.

2. “If consumers do not buy less of a commodity when their incomes rise, they will surely
buy less when the price of the commodity rises.” Why?

3. Orange juice and apple juice are known to be perfect substitutes. Draw the appropriate
price-consumption curve (for a variable price of orange juice) and income-consumption
curve.

4. Left shoes and right shoes are perfect complements. Draw the appropriate price-
consumption and income-consumption curves.

5. Janelle and Brian each plan to spend $20,000 on the styling and gas mileage features of a
new car. They can each choose all styling, all gas mileage, or some combination of the two.
Janelle does not care at all about styling and wants the best gas mileage possible. Brian likes
both equally and wants to spend an equal amount on each. Using indifference curves and
budget lines, illustrate the choice that each person will make.

6. Karl’s preferences over hamburgers (H) and beer (B) are described by the utility function:
U(H, B) = min(2H, 3B). His monthly income is I dollars, and he only buys these two goods
out of his income. Denote the price of hamburgers by PH and of beer by PB.
a) Derive Karl’s demand curve for beer as a function of the exogenous variables.
b) Which affects Karl’s consumption of beer more: a one dollar increase in PH or a
one dollar increase in PB?

7. Rick purchases two goods, food and clothing. He has a diminishing marginal rate of
substitution of food for clothing. Let x denote the amount of food consumed and y the amount
of clothing. Suppose the price of food increases from Px1 to Px2. On a clearly labeled graph,
illustrate the income and substitution effects of the price change on the consumption of food.
Do so for each of the following cases:
a) Case 1: Food is a normal good.
b) Case 2: The income elasticity of demand for food is zero.
c) Case 3: Food is an inferior good, but not a Giffen good.
d) Case 4: Food is a Giffen good.

8. Ginger’s utility function is U(x, y) = x2y, with associated marginal utility functions MUx =
2xy and MUy = x2. She has income I = 240 and faces prices Px = $8 and Py = $2.
a) Determine Ginger’s optimal basket given these prices and her income.
b) If the price of y increases to $8 and Ginger’s income is unchanged, what must the
price of x fall to in order for her to be exactly as well off as before the change in Py?

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