Unit 3 Sessions 3 & 4

Show all your working!

1. Murphy was consuming 100 units of X and 50 units of Y. The price of X rose from 2 to
3. The price of Y remained at 4.
a. How much would Murphy's income have to rise so that he can still exactly
afford 100 units of X and 50 units of Y?

2. Suppose a consumers utility derived from consuming bananas is described by the
functionU=3X
2
(1/3)X
3
.Compute marginal utility.
a. Make a table showing marginal utility for X from 1 to 7 units.
b. What is the largest number of units of X this individual would ever choose to
consume? Explain.

3. Larry and Teri allocate their consumption between two goods: hats and bats. The price
of hats is $4 each and the price of bats is $8 each. For Larry, the marginal utility of
the last hat consumed was 8 and the marginal utility of the last bat was 24. For Teri
the marginal utility of the last hat was 6 and the marginal utility of the last bat was
12. Which consumer is not maximizing his/her utility? How can you tell? How should
he/she change their allocation?

4. Given the utility function u(x
1
, x
2
) = x
1
, x
2
. Explain the significance of a utility
function.
a. Calculate total utility when x
1
= S onJ x
2
= 4.
b. List 3 additional points on the indifference curve that passes through the point
(3,4).
c. Explain the significance of the marginal rate substitution (MRS).
d. Calculate the MRS at the point (3,4).
e. Given another Utility function u
-
(x
1
, x
2
) = Sx
1
, x
2
-1u. Is there a relationship
between u(x
1
, x
2
) and u
-
(x
1
, x
2
)? If so, explain it.

5. What do we mean by consumers optimal choice and where are likely to find it?

6. Suppose a consumer has the utility function u(x
1
, x
2
) = x
1
, x
2
2
The price of good 1 is
P
1
= S, the price of good 2 is P
2
= 1 and his income is $270.
a. Solve for the consumers MRS.
b. Write down the budget constraint. What is the slope of the budget line?
c. . What is the consumers optimal choice of goods 1 and 2

7. The demand equation for a good x
1
is x
1
=
m-2P
1
+10P
2
2P
1
. Solve for the inverse demand
function and explain it?