PS2: Due April 9th 10: 30 am in office NAME of group members:Key

1. Given the utility function: 𝑢(𝑥1 , 𝑥2 ) = 2𝑙𝑛𝑥1 + 𝑙𝑛𝑥2

a. Find the expression for marginal rate of substitution
−2𝑥
MRS= 𝑥 2
1
b. Assume that 𝑥2 = 4 & 𝑥1 = 2. (i) compute the MRS (ii) provide an interpretation for
the MRS
(i) -2
(ii) The consumer will need 2 units of 𝑥2 for every 1 unit of 𝑥1 that he gives up, to
keep utility constant.
2. Given the utility function: 𝑢(𝑥1 , 𝑥2 ) = 0.5𝑙𝑛𝑥1 + 0.5𝑙𝑛𝑥2 , m=$10, 𝑝1 = $1 &𝑝2 = $2.
Find the optimal choice for 𝑥1 &𝑥2 .
𝑥1 = 5 &𝑥2 = 2.5
3. 𝑥1 &𝑥2 are complements. The consumer consumes 4 units of 𝑥1 for every 1 unit of 𝑥2 .

a. Write out the utility function and the equation for the budget line.
𝑢(𝑥1 , 𝑥2 ) = 𝑚𝑖𝑛{0.25𝑥1 , 𝑥2 }
𝑠𝑡: 𝑝1 𝑥1 + 𝑝2 𝑥2 = 𝑚
b. Assume that m=$100, 𝑝1 = $5 &𝑝2 = $2. Find the optimal choice for 𝑥2 .
𝑥2 = 4.545
4. 𝑥1 &𝑥2 are substitutes. The consumer is willing to substitute 2 units of 𝑥1 for every 1 unit
of 𝑥2 . Assume that m=$100, 𝑝1 = $4 &𝑝2 = $8. Find the optimal choice for 𝑥1 &𝑥2 .

Note: the slope of the budget constraint = slope of the indifference curve = -0.5
(𝑥1 , 𝑥2 ) = (𝑥1 , 12.5 − 0.5𝑥1 )
5. Given the utility function: 𝑢(𝑥1 , 𝑥2 ) = 2ln(𝑥10.5 + 𝑥20.5 )
a. Find the indirect utility function
𝑚 𝑚
𝑣(𝑝, 𝑚) = +
𝑝1 𝑝2
b. Find the expenditure function
𝑢𝑝1 𝑝2
𝑒(𝑝, 𝑢) =
𝑝1 + 𝑝2

c. Find the Hicksian demand function

𝑢𝑝2 (𝑝1 + 𝑝2 ) − 𝑢𝑝1 𝑝2
ℎ1 (𝑝, 𝑢) =
(𝑝1 + 𝑝2 )2

𝑢𝑝1 (𝑝1 + 𝑝2 ) − 𝑢𝑝1 𝑝2

ℎ2 (𝑝, 𝑢) =
(𝑝1 + 𝑝2 )2

𝑚
6. Given the indirect utility function 𝑣(𝑝1 , 𝑝2 , 𝑚) = 𝑝 . Find the Marshallian demands
1 +𝑝2
𝑚
𝑥𝑖 (𝑝, 𝑚) = 𝑝 (Roy’s Identitiy)
1 +𝑝2