Nama

:
NIM
:
Mata Kuliah : Ekonomi Mikro
Ekonomi BKU Akuntansi / Reguler Pagi
Program Studi Magister Ilmu Ekonomi Universitas Sriwijaya
1. The text said that raising a number to an odd power was a monotonic transformation. What
about raising a number to an even power? Is this a monotonic transformation? (Hint: consider
the case f(u) = u2.)
Answer:
A monotonic transformation by a function f(u) that transforms each number u into some other
number f(u), in a way that preserves the order of the numbers in the sense that u 1 > u2 implies
f(u1) > f(u2), A monotonic transformation and a monotonic function are essentially the same
thing, That rate of change of f(u) as u changes can be measured by looking at the change in f
between two values of u, divided by the changes in u:
f = f(u2) f(u1)
u=
u2 u1
For a monotonic transformation, f(u2) f(u1) always has the same sign as u2 u1.
2. If two goods are perfect substitutes, what is the demand function for good 2?
Answer:
If two goods are perfect subtitutes, then consumes will purchase cheaper one. If both goods
have the same price, then the consumer doest care which one he or she purchases. The
function that relates the optimal bundle of two goods to the different values of prices and
incomes is called the demand function. In other words, quantity demanded of each good is a
function of market price and the income of the consumer. Two goods x1 and x2 are said to be a
perfect substitutes when demand for x1 increases as price for x2 increases. Consuming either
good gives same satisfaction to the consumer, and he will buy the one with lower price.
Given the income of the consumer as m, if x1 and x2 are perfect substitues and their prices are
p1 and p2 respectively, the demand function for x2 will be
x2 =

m
p2 ,when p1 > p2

x2 = any number between 0 and

m
p2 , when p1 = p2

x2 = 0, when p1 < p2
The function can be summarized as

If price x1 is greater than the price of x2, the consumer will spend his entire income only on

x2.
If price of x1 is equal to the price of x2, there are various optimal bundles of two goods that

satisfies the budget constraint.

If price of x1 is less than the price of x2, the consumer will spend his entire income only on
x1, and consume zero units of x2.
4

3. If a consumer has utility function u(x 1,x2) = x1 x 2 , what fraction of her income will she
spend on good 2?
Answer:
4
The utility function of the form u(x1,x2) = x1 x 2 represents Cobb-Douglas preferences with

c = 1 and d = 4. The demand function for x1 and x2 for the Cobb-Douglas is p1x1 + p2x2 = m.
To find the demand function for good 2, substitute into the budget constraint to get
x 2=

m p1 c m

p2 p2 c+d p1

x 2=

d m
c+ d p2

The fraction of her income that she will spend on good 2 is

dm = (c+d)p2x2
m=

5 p2 x2
4