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ECON 310 – Fall 2006. Chapter 4 – “Consumer Choice.” “Review Questions” (pages 128-129): 1, 2, 3, 4, 5, 6, and 7. “Problems” (pages 129-132): 4.1, 4.2, 4.3, 4.4, 4.5, 4.6, and 4.8. Additional Questions: 1) Consider an individual with 200=I facing prices of )5,4(),(21=pp . Graphically illustrate the budget line of this consumer. Graphically illustrate each of the following consumption bundles in relation to this budget line, and explain why each bundle is either affordable or not affordable. i. )30,10(),(21=xx. ii. )40,50(),(21=xx . iii. )20,30(),(21=xx . iv. )10,40(),(21=xx. v. )15,25(),(21=xx . 2) Consider a consumer with monotonic preferences. Which of the bundles in parts (i) through (v) of Question 1 could potentially maximize utility? Explain. 3) For a consumer with preferences that can be represented by 21)( xxXu = , the marginal utility for each commodity is 21xMU= and 12xMU =. Determine optimal levels of consumption as functions of 1p , 2p , and I. Determine the optimal levels of consumption as functions of 1p , 2p , and I if instead 214)( xxXu = (in which case 1212xxMU = and 2122xxMU = ). 4) Mo has monotonic preferences for 1x and 2x . For each of the following scenarios, clearly explain how his budget line will change and determine if he will be “better off” or “worse off” as a result of the change (if it is not possible to determine if he will be “better off” or “worse off,” clearly explain why): i. An increase in 1p , with 2p and I unchanged. ii. A decrease in I, with 1p and 2p unchanged. iii. A simultaneous increase in 1p and I, with 2p unchanged. iv. A 15% decrease in both 1p and 2p , with I unchanged. v. A 5% increase in 1p, 2p, and I.5) Consider a consumer with preferences that can be represented by the utility function }5,2min{)(21xxXu = . Determine optimal levels of consumption as functions of 1p , 2p , and I. Determine the functional form of ).,,(21IppV 6) The graph below illustrates Joel’s budget constraint, along with three of his indifference curves. Based upon this graph, answer the following. i. Suppose Joel wants to maximize his utility, subject to the constraint of Ixpxp ≤+2211. Considering each of the five bundles illustrated above, clearly explain why the bundle is or is not a “solution” to this problem. ii. Suppose 500=I . Determine the values of 1p and 2p. iii. Could 212212),,(ppIIppV = be the correct functional form for Joel’s indirect utility function? Explain. iv. Suppose Joel wants to realize 40)(=XU while spending as little money as possible. Considering each of the five bundles illustrated above, clearly explain why the bundle is or is not a “solution” to this problem. 7) Explain why each of the following could not be a valid indirect utility function: a. IppIppV+=21215),,( b. IppIppV2121),,( = c. 2121),,(ppIIppV = Guns 0 U = 50 U = 40 U = 25 25 0 Roses 5 A B C D


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