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Problem 1
Explain why a consumer’s optimal choice is the point at which her budget constraint is tangent to
an indifference curve.
Problem 2
∂U ∂U
(a) Calculate and
∂x ∂y
(b) Evaluate these partial derivatives at x = 1, y = 2.
Problem 4
You have $3,000 to spend on entertainment this year. The price of a day trip (T ) is $40 and the
1 2
price of a pizza and a movie (M ) is $20. Suppose that your utility function is U (T, M ) = T 3 M 3 .
(a) What combination of T and M will you choose?
(b) Suppose that the price of day trips rises to $50. How will this change your decision?
Problem 5
1 2
U (x1 , x2 ) = (x1 − 5) 3 (x2 − 10) 3
The price of good x1 is equal to p1 and the price of good x2 is p2 . The total income of the
individual is given by I.
(b) Calculate the demand for each one of the two goods
(c) Is good x1 a normal or an inferior good? What about good x2 ? Make sure to justify your
answers.
(d) Calculate the elasticity of demand for each one of the two goods.