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FTX3044F tutorial Soluton
Finance IIA

- The MRS and the Cobb-Douglas
- Consumption Theory With Reference
- DKE532_Ch01
- Tutorial 5
- 03 Rec 1
- art%3A10.1007%2Fs00199-002-0327-2.pdf
- Consumer Choice (1)
- LizSu
- lecfigtp_06
- CompMkts
- The Budget Line
- Demand and Supply in Economics
- Ch-4
- pointers
- Consumer Behaviour
- Design_Criteria_Based_on_Aesthetic_Considerations
- joyjoy
- Topics History Equilibrium 083
- 1.Agent and Principal PROBLEM
- 5004215

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Adeola Oyenubi [60 marks]

Question 1 [20 marks]

1.1 Consider a Cobb-Douglas Utility given by (, ) = 1/4 3/4, a customer has a

budget constraint given by 2 + 3 = 10. Suppose (, ) = (, ) is another utility

function. Write down an expression for (, ) and argue whether or not (, )

preserve the preference ranking under(, )? Justify your answer [4 marks].

(, ) = + [2marks]

(, ) (, ).[2marks]

1.2 Solve the maximization problem

max (, ) . . 2 + 3 = 10 . [10 marks]

,

(, , ) =

+ ( + )[]

= [2 marks]

= [2 marks]

= + [ ]

= , = [1marks each]

1.3 Suppose you are to maximize

max (, ) . . 2 + 3 = 10

,

Instead what will the answer be? Justify your answer. (Hint: You dont need to work this

out) [2 marks]

= , = [1 mark each].

maximization problems under the same budget constraint should be equal.

[4marks]

Question 2 [20marks]

2.1Katty likes to consume a bottle of coke () with half a loaf of bread (). If she had 2

bottles of coke and 3 loaves of bread the remaining two loaves will go to waste. For this

reason her utility function is given by (, ) = min(2 , ). A loaf of bread sells for

while a bottle of coke sells for . Assume that katty has only Rm (m rands). Write an

equation that represents kattys budget line? [4 marks]

= + [4marks]

2.2 Find kattys optimal consumption bundle. [12 marks]

The optimality condition is given by

= []

=

[]

+

=

[]

+

2.3 If katty has R20 and = 10 while = 5 how many units of coke and bread will be

in kattys optimal consumption bundle.

This requires simple substitution to yield = , = [ ]

Question 3[20marks]

Phiwe a utility maximizing consumer has the following utility function for Ferrari

California (denoted ) and audi A8 (denoted ): (, ) = 4 + . Ferrari goes for R2m

per unit while Audi goes for R1m per unit.

3.1 Calculate the marginal utility of [4 marks]

= []

=

= []

3.2 Assume Phiwe has R6m to spend on cars, given the prices calculate the marginal

rate of transformation of Ferrari for Audi. (Hint: You should think about what Thabo can

afford) [4 Marks]

Markets MRT is the relative price. The budget constraint is + =

[2marks]

= []

result.

=

3.3 By setting MRT equals MRS and the condition that Phiwes optimal choice must lie

on the budget line is it possible to predict how many units of Phiwe will

purchase (yes or No)? Explain your answer [5 marks]

No[2marks]

MRT and MRS are constant so that equating MRS and MRT yields no meaningful

result. This is so since the goods are perfect substitutes [3marks].

3.3 Now find the optimal bundle by calculating

and

[5 marks].

= = []

= = []

Since

<

+ =

+ =

= []

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