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# Problem Set 0

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

## Suppose U (x, y) = 4x2 + 3y 2

∂U ∂U
(a) Calculate and
∂x ∂y
(b) Evaluate these partial derivatives at x = 1, y = 2.

## (c) Write the total differential for U

dy
(d) Calculate for dU = 0 - that is, what is the implied trade-off between x and y holding U
dx
constant?

## (f) What is the marginal rate of substitution when 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

## Assume that a person’s utility over two goods is given by

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.

## (a) Write down the budget constraint of this consumer

(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