2016 quiz 1 - solutions PDF

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Quiz practice solutions
Quiz practice solutions
Quiz practice solutions
Quiz practice solutions
Quiz practice solutions
Quiz practice solutions
Quiz practice solutions
Quiz practice solutions...

Description

Econ 301 (921) Summer Session, Term I, May 2016

M. Vaney

Quiz #1 - Solutions 1. Draw budget lines for the following situations. Show the value of any intercepts and slopes of all segments. (a) G (‘000)

Slope 0

200

Slope -2

H (‘000) 20

100

120

(b) C

33.33 -1

23.33

-1.67

B 10

20

24

2. Oliver consumes three goods: Candy ( ) and Songs ( ) and Videos ( ). Oliver’s preferences can be described by the utility function ( ) = 2 5 . Oliver has income and the goods have prices C S and V . C

S

U C; S; V

P

;P

P

1

C SV

V

M

(a)

C C + PS S + PV V

P



M

(b) The utility function is a mathematical representation of preferences, the measure of utility only has meaning in an ordinal sense (utility of a bundle bundle) not in a cardinal sense. A

ln

>; <

or

=

to utility of another

transformation is a monotonic transformation and

although it will re-scale utility values it will not alter the ordering. Any monotonic increasing transformation will preserve the ordering of the original utility function.

(c) At the optimal consumption bundle, consumption of each good will be such that MU

i

i

P

Taking a

ln

for all

i

transformation

ln U (C; S; V ) = 2 ln C + ln S + 5 ln V

MU

C =

MU

MU

2

C PC 2 10

= =

S =

V

=

2 C

1 S

5 V

1

5

1 20

5 8

S = V PS PV

= 2 PS PV 1 5 1 = = 8PV 20PS 10 PS = $0:50 PV = $6:25

2...