ECON 207

Fall 2019
Answer Key Quiz I

Instructions: Please write your answers clearly and legibly. Pro-

vide full explanations for your answers and show all your work.

1. Consider the following …ve utility functions and assume that and are
positive real numbers:

U A (x; y) = x y (1)
B
U (x; y) = x + y (2)
C
U (x; y) = x + ln y (3)

U D (x; y) = ln x + ln y (4)

U E (x; y) = ln x ln y (5)

(a) Calculate the formula for MRS for each of these utility functions.
dy Ux
M RS = jU =k =
dx Uy
x 1y y
M RSA = =
x y 1 x
M RSB =

M RSC = = y
y
1
x y
M RSD = 1 =
y
x

x y
M RSE = =
y
x

(b) Which utility functions represent tastes that have linear indi¤erence
curves?
MRS is the slope of an indi¤ erence curve. If there is a linear indi¤ erence
curve, it should have a constant MRS. Therefore, only U B represents
tastes that have linear indi¤ erence curve.
(c) Which of these utility functions represent the same underlying tastes?
Two conditions have to be met for utility functions to represent the same
tastes: (1) the indi¤ erence curves they give rise to must have the
same shapes, and (2) the numbering on the indi¤ erence curves needs
to have the same order (though not the same magnitude.) To check

1
 that indi¤ erence curves from two utility functions have the same
shape, we have to check that the MRS for those utility functions are
the same. This is true for U A ;U D and U E :
To check that the ordering of the numbers associated with indi¤ erence
curves goes in the same direction, we need to go back to the utility
functions. In U A , for instance, more of x and/or y means higher util-
ity values. The same is true for U D . Thus U A and U D represent the
same underlying tastes because they give rise to the same shapes for
all the indi¤ erence curves and both have increasing numbers associ-
ated with indi¤ erence curves as we move northeast in the graph of the
indi¤ erence curves. But U E is di¤ erent: While it gives rise to indif-
ference curves with the same shapes as U A and U D , the utility values
associated with the indi¤ erence curves become increasingly negative,
i.e. they decline, as we increase x and/or y. Thus, higher numerical
labels for indi¤ erence curves happen to the southwest rather than the
northeast, indicating that less is better than more. So the only two
utility functions in this problem that represent the same tastes are
U A and U D :
(d) Which of these utility functions represent tastes that have strictly
convex indi¤erence curves?
As we move to the right on an indi¤erence curve, x increases and y
decreases. We can then look at the formulae for MRS that we de-
rived for each utility function to see what happens to the MRS as x
increases while y decreases. M RSA ; M RSC ; M RSD and M RSE de-
creases. Remember that if "more is better" assumption is satis…ed,
having diminishing MRS is equivalent to having strictly convex in-
di¤erence curve. As in utility function A, C and D, "more is better"
assumption is satis…ed these utility functions represent tastes that
have strictly convex indi¤erence curves. However, "more is better"
assumption is not satis…ed in utility function E, and at least as good
as set represented by the utility function E is not strictly convex.
Therefore, the indi¤erence curves that are represented by the utility
function E are not strictly convex.