Intermediate Microeconomics Homework 1

Lecturer: PhD. Candidate Phan The Cong Email: congphanthe@gmail.com

1. Consider two utility functions U(X1,X2) and V(X1,X2) such that U (X1,X2) = f(V(X1,X2)) with f() being a strictly increasing function. Prove that both utility functions represent the same preferences. 2. Mara lives in the beautiful country of Inflationlandia. She earns 30 million pesos a month. She only consumes hamburgers and buns. The price of a dozen hamburgers is 2 million pesos and the price of a dozen buns is 1 million pesos. a. Graph her budget set with dozens of hamburgers in the X axis and dozens of buns in the Y axis. b. What is the slope of the budget line? c. Tiring of having to deal with too many zeros in the peso bills the government decided to erase six zeros of every price and income. Graph her new budget set. d. Mara likes to eat each hamburger with one bun. She doesnt like to eat hamburgers or buns alone. Graph her indifference curves that go through the following points (5,5), (10,10) and (15,15). e. Find a utility function that represents her preferences. f. Given her income and the prices of hamburgers and buns, what will she buy? g. If her income is m and the prices of a dozen hamburgers and buns are PH respectively, what are her demand functions? and PB

3. The monkey Bobo likes to eat apples and bananas. While he is not sleeping he collects apples and bananas in thbo forest. They are difficult to find. He finds one apple for every hour in which he is searching for apples and one banana for every hour he is searching for bananas. He has 18 hours a day to search for fruit. a. Draw his budget set with apples in the X axis and bananas in the Y axis. b. What is the slope of the budget line? c. While Bobo likes both apples and bananas he is always willing to trade two apples for one banana. Graph his indifference curves that go through (18,0) and (0,18). d. Find a utility function that represents his preferences. e. What is Bobo going to eat?

f. If instead he needs hours to find an apple and hours to find a banana, what is his budget constraint? g. What are his demand functions? 4. All the workers in a factory have the same utility function U = X 1. X 2 , earn the same income of 10 and face the same prices P1 = 1 and P2 = 1. a. What is the optimal consumption bundle for the workers? What utility do they obtain? b. Graph the indifference curve that goes through the optimal consumption bundle. In the same graph draw the budget set. c. Unfortunately for the workers there is an increase in P1 of 100%. What is the new P1? What is the new optimal consumption bundle and what utility do they obtain? d. In the same graph as in point b, draw the indifference curve that goes through the new optimal consumption bundle and also draw the new budget set. e. The union leader argues that their wages should be increased so that they are able to buy the same bundle they were buying before the increase in prices. What percentage increase in wages is he asking for? f. If the firm accepts the demand of the union leader, what will be the consumption bundle and utility of the workers? g. In the same graph as in point b, draw the indifference curve that goes through the new optimal consumption bundle and draw the new budget set. h. What is the percentage increase in wages so that workers are as happy as they were before of the increase in P1? 5. Consider the following utility function: U = X 12 . X 22 a. Draw the indifference curve that yields U = 5 (find X2 as a function of X1 with U = 5). b. Find the MRS for every consumption bundle. Is the MRS decreasing in X1? c. In a new figure graph her budget set if P1 = 1, P2 = 1 and M = 10.
* d. Find her optimal consumption bundle ( X 1* ; X 2 ) and draw it in the figure. *' e. Find her optimal consumption bundle ( X 1*' ; X 2 ) if P1 = 2, P2 = 1 and M = 10 and draw it in

the figure. f. How high must M be for the consumer to be able to reach the old utility level U = 5 at the new prices? Draw this new budget line. g. Find ther optimal consumption given the new prices and the income from point f and draw it in the figure. h. Find the income and substitution effects based on points e. and g.