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Part A
5. If two different consumption bundles are on the same indifference curve, what does this imply
about the consumers preferences over the two? What if bundle A is on a higher indifference
curve than bundle B?
6. What does the marginal rate of substitution (M RSl,C ) measure? How is it related to the
indifference curve?
7. If the indifference curve is convex, what does this imply about the marginal rate of substi-
tution?
9. What does the time constraint state? Write it down and explain what each of the letters
represent.
10. What are the consumers sources of income in our model? What can the consumer in our
model do with this income? Write down the consumers budget constraint and explain what
each of the letters stand for.
18. Show graphically that convex indifference curves imply a taste for diversity.
19. Draw an arbitrary downward-sloping budget constraint and arbitrary indifference curves
over leisure and consumption (satisfying the usual assumptions).
(a) Denote the optimal choice as point A. Using your figure, explain briefly why no other
choice can be optimal.
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(b) Imagine that the consumers preferences change so that she now values leisure more
than previously. Show how this will change her indifference curves, her optimal choice,
and her labor supply curve.
20. Show graphically that an increase in the real wage can have an ambiguous effect on the labor
supply, but that the effect on consumption is unambiguous.
Part B
1. Show graphically that if more is always preferred to less, an indifference curve cannot slope
upwards.
2. Textbook review question 6. Explain in words, why the consumer could not be choosing
optimally if the equality (=) in the condition were replaced with a greater than (>) or
smaller than (<).
5. Textbook problem 5.
6. Textbook problem 7.
7. Textbook problem 8.
8. Textbook problem 9.
9. Textbook problem 10.
10. Textbook problem 11.
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Part C
1. Write down the production function of a firm, explaining what each of the letters stand for.
3. What is the marginal product of labor (M PN )? How is it related to the production function
F?
4. List the five key properties of the production function and briefly explain what it implies in
terms of the production function.
5. Write down the firms profit function and explain what each of the letters represents.
6. When the firm maximizes its profits, what condition is satisfied? Explain in words, why the
profits would not be maximized if the equality (=) in the condition were replaced with a
greater than (>) or smaller than (<).
11. Draw arbitrary revenue (zF K, N d ) and variable cost (wN d ) functions for a firm.
(a) Denote the firms profit-maximizing choice of labor by N . Using your figure, explain
why no other choice can be optimal.
(b) Imagine that the wage increases. How would this affect the firms optimal choice and
its labor demand curve?
(c) Imagine now instead that total factor productivity increased. How would this affect
the firms optimal choice and its labor demand curve?
12. Show graphically the effects on the firms optimal hiring from a drop in the wage. What is
the impact on its labor demand curve?
13. Show graphically the effects on the firms optimal hiring from a fall in total factor produc-
tivity. What is the impact on its labor demand curve?
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18. Textbook problem 17.
If you are interested, the mathematical appendix (pp. 662-665) shows how the consumer and
firm optimization problems can be solved using calculus, and has some practice problems as
well. Calculus is not required for this class, so this material will not be covered in class or
on the tests.