ECON 340 HW 2 – Suppose that Richie consumes

ECON 340 HW 2 – Suppose that Richie consumes

Subject: Economics    / General Economics
Question
ECON 340 Spring 2017 HW#2

1. Suppose that Richie consumes two goods: pretzels (p) and soda (s). His
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utility function is u = ps. The price of a bag of pretzels is $8, while the
price of a bottle of soda is 4. Richie has $72 in income.
(a) What is Richie’s M RSp,s in terms of p and s?
(b) What is Richie’s budget constraint?
(c) Solve for Richie’s optimal consumption bundle.
2. For each of the following, find the optimal consumption bundle
(a) U = xy, Px = 2,Py = 5, I = 40
1 1 (b) U = x 2 y 2 , Px = 8, Py = 4, I = 60
2 (c) U = 3x + y 3 , Px = 6, Py = 8, I = 30
3. For each of the following, use the concept of revealed preferences to rank
the two bundles of goods. If you cannot rank them, explain why.
(a) The price of a Anderson and Sheppard 3-piece suit is £4295. The
price of a Huntsman 2-piece suit is £4895. Tim buys a 3-piece Anderson and Sheppard suit.
(b) The price of a Whataburger Monterey Melt is $5.39 (just the sandwich). The price of a Whataburger Montery Melt Value Meal is
$7.39, and includes the sandwich, french fries and a soft drink. Ariel
buys the Whataburger Monterey Melt (not the value meal).
(c) Betty offers to take Sally to the movies, where Betty will buy her
ticket ($10). She instead goes to the movies with Glen and pays for
her own ticket. [the two bundles are Betty and Glen]
4. Suppose Clarissa consumes two goods: hair bands (h) and Pearl Jam
1 1
tickets (t). Her utility function is U = h 2 t 2 . The price of hair bands is
$2, the price of Pearl Jam tickets is $8, and Clarissa has $200 in income.
(a) Derive an expression for her demand curve for Pearl Jam tickets.
(b) Derive an expression for her Engel curve for Pearl Jam tickets.
(c) Use your answer from (b) to derive her income elasticity of demand
for Pearl Jam tickets. 1