MICROECONOMICS I
PROBLEM SESSION-2
10.10.2016
1. Ayşegül prefers market basket P to Q, basket Q to R and basket P to R. Rather than offering to let Ayşegül choose
among P, Q and R, offer only two baskets at a time.
a. Offer a choice between P and Q; then offer a choice between the one selected and R. Which basket would be
Ayşegül’s final choice?
b. Now first offer a choice bettween Q and R; then offer a choice between the basket selected and P. Which
would be chosen?
c. Compare your answers to a and b. Are Ayşegül’s preferences transitive?
d. What happens in a and b if Ayşegül prefers P to Q, Q to R, and R to P? Are these preferences transitive?
2. The following combinations of goods X and Y represent various market baskets. Consumption is measured in
pounds per month.
Market Basket
A
B
C
D
Units of X
4
16
15
3
Units of Y
6
Explain which market basket(s) is(are) preferred to
7
other(s), and if there is any uncertainty over which is
3
preferable, point this out as well.
2
3. Each of the following consumers exhibit behavior that violates one of the basic assumptions of consumer
preferences. Identify the assumption that is violated for each individual.
a. Kadir says that he can watch 2 movies a week but doesn’t want to watch another movie after that.
b. Mustafa says that he prefers going to a movie over hiking. He also indicates that he prefers hiking to
swimming. Alex then states that he would rather go swimming than go to a movie.
c. Aysel says that she prefers hiking to watching a movie but can't determine her preferences for swimming.
4. Serhat consumes only wine and pasta. The following three baskets are on his indifference curve: A (1,8) B(2,4)
C(3,2), where (1,8) = (1 pound of pasta, 8 bottles of wine), etc.
a. Draw Serhat’s indifference curve, with pounds of pasta per week on the horizontal axis and bottles of wine per
week on the vertical axis. Label points A, B, and C.
b. What is the MRS between A and B? Between B and C? Does Serhat’s indifference curve satisfy the
assumption of diminishing MRS?
5. Suppose an individual has the utility function U=X1/2Y1/2. We assume that utility is measured in utils. If
consumption level of Y is specified at particular level, say Y=9 units, draw the total and marginal utility curves for
this individual. Explain if marginal utility is diminishing.
6. Suppose that Bridget and Erin spend their income on two goods, food (F) and clothing (C). Bridget’s preferences
are represented by the utility function U(F, C) = 10.F.C while Erin’s preferences are represented by the utility
function U(F, C) = 0,20 F2C2 (CH 3, EXERCISE 5, P.107)
a. On a graph, with food on the horizontal axis and clothing on the vertical axis, identify the set of points that
give Bridget the same level of utility as the bundle (10,5). Do the same for Erin on a separate graph.
b. On the same two graphs, identify the set of bundles that give Bridget and Erin the same level of utility as the
bundle (15,8).
c. Do you think Bridget and Erin have the same preferences or different preferences? Explain.
7. Calculate marginal utilities and marginal rates of substitution for some common utility functions.
U(x,y)
MUx
MUy
MRSx,y
2x+3y
4x+6y
ax+by
2x1/2+y
lnx+y
x.y
xayb
(x+2)(y+1)
(x+a)(y+b)
xa+yb
8. Draw two typical indifference curves for each of the following cases. Describe the MRS in each case.
a. Selpak and Nova tissue for a consumer who considers the two goods equal in every way.
b. Right gloves and left gloves for a consumer who only wants to wear gloves in pairs.
c. Peanut butter and jelly for an individual that will not eat peanut butter sandwiches or jelly sandwiches, but
loves peanut butter and jelly sandwiches made with two parts peanut butter and one part jelly.
d. Tickets for Knott's Berry Farm (KBF) and Universal Studios (US) for a tourist that believes that KBF and US
are perfect substitutes.
9. Leyla has the utility function U(x, y)=x+3y
a. Draw the indifference curve passing through the point (x, y)=(3, 3)
b. Draw the indifference curve connecting bundles thet give Leyla a utilty of 6.
10. Elif’s utility function is U(x, y) = min {x, y}
a. If Elif consumes 4 units of x and 4 units of y, her utility is ______________
b. If Elif consumes 4 units of x and 5 units of y, her utility is ______________
c. If Elif consumes 3 units of x and 3 units of y, her utility is ______________
11. Ahmet consumes two goods, tea and sugar. Ahmet has very discriminating tastes and will enjoy his beverage if it
has two teaspoons of sugar (S) per cup of tea. (T)
a. Write a utility function that represents Ahmet’s preferences. U (S, T) = _______________________________
b. Sketch the indifference curves which Ahmet’s utility is 6 and 8.
12. Selin thinks a cup of Turkish Coffee (x) is just as good as two cups of Espresso (y).
a. Write a utility function that represents Selin’s preferences. U (X, Y) = ______________________________
b. Sketch the indifference curves which Selin’s utility 10 and 12.
13. Match the following descriptions of preferences to the indifference curve diagrams that follow.
a. Ceren does not care whether she has more diet soft drinks or fewer diet soft drinks.
b. Can is very picky about his buttered popcorn. He tops every quart of popped corn with exactly one quarter cup
of melted butter.
c. Feyza likes M&M's, plain and peanut. For Feyza, the marginal rate of substitution between plain and peanut
M&M's does not vary with the quantities of plain and peanut M&M's she consumes.