Tutorial 1

1. Find fx and fy for the following:

(a) f(x, y) = (2x - 3y)/(x + y)

(b) f(x, y) = (x2 -3y)(x 2)
(c) f(x, y) = (x2 1)/xy

Answer

(a) fx = 5y/(x + y)2 fy = -5x /(x + y)2

(b) fx = 3x2 -4x 3y fy = -3x + 6
(c) fx = (x2 + 1)/x2y fy = (-x2 + 1)/xy2

2. Given the utility function: U = X0.5Y0.5, find the MUx and MUy functions. Are they
functions of both goods?

Answer

MUX = 0.5X-0.5Y0.5 = 0.5(Y/X)

MUY = 0.5X0.5Y-0.5 = 0.5(X/Y)

Both depend on the both goods (on how much the consumer has consumed of each
good.

3. If the utility function of an individual is of the form:

U = U(X1, X2) = (X1 + 2)2(X2 + 3)3

Where U stands for total utility and X1, X2 for the quantities of the two goods
consumed:

(a) Find the marginal utility function for each good.

(b) Find the numerical value of marginal utility of X1 (assuming an imaginary unit
of utility called util) when 3 units of each good are being consumed.
Answer

(a) U1 = 2(x1 + 2)(x2 + 3)3, U2 = 3(x2 + 3)2(x1 + 2)2

(b) U1(3, 3) = 2,160

4. Using the simple Keynesian model:

C = + (Y T) ( > 0; 0 < < 1)

T = + Y ( > 0; 0 < < 1)
Y = C + I0 + G0

Which results in the equilibrium National Income (Y*):

Y* = ( + I0 + G0)/(1 + ) (1)

Find the partial derivatives, Y*/I0, Y*/, Y*/.

Interpret their meanings and determine the sign.

Answer

Y*/I0 (investment multiplier) = Y*/ (autonomous consumption multiplier)

= 1/(1 + ) > 0

Y*/ = [-(1- +) + (1 )( - + I0 + G0)] / (1 + )2

= [-(1- +)]/ (1 + )2 + [(1 )( - + I0 + G0)] / (1 + )2

= [-/(1 + ) + (1 )Y*/(1 + ) [using (1)]

= [- + (1 )Y*] / (1 + )

= (Y* - T*)/(1 + )

Y*/ > 0
5. Given:

Y = 840 333.33i (IS)

Y = 704 + 800i (LM)

Write this IS-LM system in matrix form and solve for the equilibrium Y and interest rate, i.

Answer

Y + 333.33i = 840
Y - 800i = 704
1 333.33 Y 840
=
1 -800 i 704

Y* = 800, i* = 0.12 (12%)

6. The export demand function (foreign demand for our exports), X depends on foreign
national income, Yf, and our price level, P: X = Yf1/2 + P-2. Find the partial elasticity of
foreign demand for our exports with respect to our price level.

Answer

XP = (X/P)/(X/P) = (-2P-3)/(Yf1/2P-1 + P-3) = -2/( Yf1/2P2 + 1)