Econ 201 Assignment 1 PDF

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VICTORIA UNIVERSITY OF WELLINGTON SCHOOL OF ECONOMICS AND FINANCE ECON201

2021 MARKED ASSIGNMENT 1 Utility Maximization, Demand, Price and Income Changes

This assignment is assessed. Please submit it through the assignment submission link on Blackboard by 12pm on Monday, 22 March. Write down your name, your student ID, the name of your tutor and the time of your tutorial. 1. [25 points] Draw your indifference map for right shoes and left shoes, while taking into account the information below. Plot right shoes on the horizontal axis and left shoes on the vertical axis. Provide a brief explanation of your graphs. a. b. c. d.

You like having more pairs of shoes, but you would never wear a left shoe on your right foot, or a right shoe on your left foot. Now suppose that you hurt your left leg and have to wear a cast (which means you cannot wear shoes on your left foot) for 6 months. Next, suppose that you hurt your right foot instead. A crazy scientist invents a new type of shoes. Just like socks, you can now wear your left shoe on your right foot, and your right shoe on your left foot.

2. [25 points] Jim spends most of his time in Starbucks on Willis St. He has $12 per week to spend on coffee and muffins. Starbucks sells muffins for $2 each and coffee for $1.20 per cup. Jim consumes qc cups of coffee and qm muffins per week. Assume that he can buy fractions of these goods. His utility function is U (q c , q m ) = q c1 / 2q m1 / 2 . a. Draw Jim’s budget line. b. Find Jim’s optimal bundle. What utility does he attain? c. Now Starbucks has introduced a frequent buyer card. It costs $2 per week, but it gives him a discount of 20 cents per cup of coffee. If Jim buys this card, how will his consumption of coffee and muffins change? What utility will he attain? d. Should Jim buy this card?

3. [25 points] Suppose that you have the following utility function: U(L,Y) = L0.5*Y0.5, where L is hours of leisure and Y is other goods. The price of Y is 1. For now suppose that wages are your only source of income. There are 24 hours in a day. a. Assume that your hourly wage is 1. Write down your budget constraint. b. How many hours of labour would you supply when your hourly wage is 1? You can use any method you want. c. Now suppose that your hourly wage increases to 2. How many hours of labour would you supply now? d. Finally, imagine that you have received an inheritance which always pays you 8 dollars per day. The hourly wage is still 2. How many hours of labour will you supply?

4. [25 points] given by

A consumer’s preferences over food (x) and other goods (y) are

U(x,y) = xy with marginal utilities MUx = y and MUy = x. The consumer’s income is $32,400. a. Calculate the optimal basket when Px=40 and Py=10. b. Calculate the income and substitution effects (in terms of changes in quantity of x demanded) of an increase in the price of food to Px=90. c. Calculate the Compensating Variation of the price change.

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ECON 201 2021 Marked Assignment 1 2...