Microeconomics 2012-2013 IBA

Tutorials

Problem sets
Tutorials Microeconomics IBA
2012-2013

Microeconomics 2012-2013 IBA

Tutorials

Problem set 1: Chapters 2 and 3

Microeconomics 2012-2013 IBA

Tutorials

CHAPTER 2: Demand and supply analysis

Before making these exercises, you should finish Homework Week 1, Chapters 1 & 2 in
WileyPlus.

Question 2.1
Use supply and demand curves to illustrate the impact of the following events on the market
for coffee:
a) The price of tea goes up by 100 percent.
b) A study is released that links consumption of caffeine to the incidence of cancer.
c) A frost kills half of the Colombian coffee bean crop.
d) The price of styrofoam coffee cups goes up by 300 percent.

Question 2.2
Suppose that the market is in equilibrium. Draw a diagram for the following situations. What
happens to the equilibrium price and equilibrium quantity?
a) The market for holidays in the US by Europeans: the meteo-service predicts a very heavy
tornado-season.
b) The magazine market: the price of ink has increased and the price of newspapers has
increased.

Microeconomics 2012-2013 IBA

Tutorials

CHAPTER 3: Consumer preferences

and the concept of utility

Before making these exercises, you should finish Homework Week 2, Chapter 3 in
WileyPlus.

Question 3.1
Draw indifference curves to represent the following types of consumer preferences and write
down a utility function that fits the description
a) I like both peanut butter and jelly, and always get the same additional satisfaction from
once ounce of peanut butter as I do for 2 ounces of jelly.
b) I like peanut butter, but neither like or dislike jelly.
c) I like peanut butter but dislike jelly.
d) I like peanut butter and jelly, but I only want 2 ounces of peanut butter for every ounce of
jelly.

Question 3.2
Julie and Toni consume two goods with the following utility functions:
UJulie = (x + y)2, UToni = x + y.
a) Graph an indifference curve for each of these utility functions.
b) Julie and Toni will have the same ordinal ranking of different baskets if, when basket A is
preferred to basket B by one of the functions, it is also preferred by the other. Do Julie and
Toni have the same ordinal ranking of different baskets of x and y? Explain.

Microeconomics 2012-2013 IBA

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Question 3.3
Consider the utility function U(x, y) = xy + x.
a) Is the assumption that more is better satisfied for both goods?
b) Determine the marginal utility of x. Does the marginal utility of x diminish, remain
constant, or increase as the consumer buys more x? Explain.
c) Determine the marginal utility of y. Does the marginal utility of y diminish, remain
constant, or increase as the consumer buys more y? Explain.
d) What is MRSx, y? Is MRSx, y diminishing, constant, or increasing as the consumer
substitutes x for y along an indifference curve?
e) On a graph with x on the horizontal axis and y on the vertical axis, draw a typical
indifference curve (it need not be exactly to scale, but it needs to reflect accurately
whether there is a diminishing MRSx, y). Also indicate on your graph whether the
indifference curve will intersect either or both axes. Label the curve U1.
f) On the same graph draw a second indifference curve U2, with U2 > U1.

Question 3.4
Suppose a consumers preferences for two goods can be represented by the CobbDouglas
utility function U(x, y) = Axy , where A, , and are positive constants. Answer all parts of
Question 3.3 for this utility function.