Davidson
College Mark C.
Foley
Department
of Economics Fall 2002
Due Monday,
September 23rd, in class[*]
Problems
1.
Draw an indifference curve map characterized by each of the following:
(Put
each on a separate graph.)
a. Diminishing marginal rate of
substitution
b. A violation of the axiom
"more is better"
c. Perfect substitutes
d. Perfect complements
e. Increasing marginal rate of
substitution
f. One good is an economic
"bad" (that is, "you would have to pay
me to eat boiled
peanuts!")
g. One good is economically
"neutral"
2.
What are the two conditions for optimization (maximization) of a consumer’s
utility? Write them down and explain
them in words and graphically.
3.
Draw a diagram of an individual’s consumption decision between xylophones (put
it on the x-axis) and yo-yo’s. Now
assume the price of a xylophone increases. Graphically show the income and
substitution effects such that xylophones are inferior but not a Giffen
good. Be sure to explain the movements between your initial consumption bundle (call
it point X), the intermediate/hypothetical point Y, and the final consumption
bundle (point Z).
4.
Suppose that the marginal utility of the last dollar John spends on food is
greater than the last dollar he spends on shelter. For example, suppose the prices of food and shelter are $1 per
pound And $2 per square yard, respectively, and that the corresponding marginal
utilities are 6 and 4. Show that John
cannot possibly be maximizing his utility.
Textbook Problems &
Applications
Ch.
6, Problems 4 and 7
Ch.
21, Problems 3, 11, and 12
Ch.
7: Problem 8
Ch.
8: Problems 4, 7, and 10