Are 100a Essay

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Managerial Economics (ARE) 100A University of California, Davis Fall Quarter, 2012 Instructor: John H. Constantine Homework 2: Due Monday October 15, 2012 Problem 1: Joe consumes cans of anchovies (X) and boxes of biscuits (Y). Each of his indifference curves exhibits strictly diminishing MRSXY. When consuming X = 2 and Y = 2 his MRS = – 1. Would he prefer a bundle of three cans of anchovies and one box of biscuits compared to his current bundle of consuming 2 cans and 2 boxes? Explain and show using a graph. Problem 2: You are to graph following indifference curves. The letters X and Y denote which axis the good in question is to be placed. Show the direction of utility maximization. Assume in all cases the two goods in question are the only goods available. (a) (b) (c) (d) Joe likes tofu (X) but is indifferent to chocolate (Y). Koop likes food (Y) but dislikes cigarette smoke (X). In addition, the more food he has the more he would be willing to give up to achieve a given reduction in cigarette smoke. Hot dogs (X) and chili (Y) in which the consumer has diminishing MRS between the two goods. Hot dogs (X) and chili (Y) in which the consumer must always eat two hotdogs per one bowl of chili.

Problem 3: Suppose you consume nothing but goods X and Y. We have two years’ of data regarding your consumption and income: Year 1: I = $10 per week; PX = $1 per unit; PY = $1 per unit. Your consumption: X = 6 units; Y = 4 units. Year 2: I = $20 per week; PX = $2.50 per unit; PY = $1.25 per unit. (a) (b) In which year are you happier? Show your result on a graph using indifference curves. In which year do you consume more Y? This should be obvious from your graph in (a), assuming your graph is correct.

Problem 4: For each of the parts below a utility function, U(X,Y) is given. For each of the utility functions you are to answer questions (i) – (iv). You must show your