ECON 410: Homework #1

Cover Page
Last Name: _______________________________________________________________________________
First Name: _______________________________________________________________________________
Class Time (12:30 or 2:00): ___________________________________________________________
Recitation TA: ___________________________________________________________________________
Onyen: ____________________________________________________________________________________

Directions:
1. This assignment is due on Tuesday, February 2 at the start of your sections class.
2. Fill out your name, class time, recitation section number, and onyen in the spaces above.
3. Your answers to the multiple choice questions must be submitted on a blue scantron. You
must write and bubble your name and PID on your scantron. You will receive a grade of zero
on the multiple choice section if you do not write and bubble your name and PID on your
blue scantron.
4. You must fill out and include this cover page and staple it to your long form answer sheets.
Homework pages MUST be stapled together- no paper clips or dog-eared corners allowed.
You will receive a grade of zero on the long form section if your homework assignment is
not stapled with this cover page.
5. Show all of your work and fully annotate your graphs on long-form questions for full credit.

Multiple Choice Questions (4 points each)

1. Consider the utility function: (, ) = ln(). How many of the following statements are
TRUE?
The assumption that more is better is satisfied for both goods.
Good x exhibits diminishing marginal utility.
The indifference curves are downward sloping and convex to the origin.
The consumer is willing to give up increasing amounts of y as she consumes more x.
a. 0
b. 1
c. 2
d. 3
e. 4

2. Sarah is planning a birthday party and has $I to spend on balloons and party favors. The
price of a party favor is $3. Her budget line for balloons and party favors is shown in the
figure below. The MRT of party favors for balloons is 4. What is her budget, I?
a. $600
b. $240
c. $200
d. $150
Balloons
e. $100
200

Party Favors

3. Consider the utility function U = 5x +3y2. Which of the following statements is TRUE as
we move to the right along a given indifference curve, with x on the horizontal axis and y on
the vertical axis?
a. The marginal rate of substitution of x for y diminishes.
b. The marginal rate of substitution of x for y is constant.
c. The marginal rate of substitution of x for y increases.
d. None of the above

4. Originally, the price of X is $25 and the price of Y is $75. If the price of X decreases by $5
and the price of Y decreases by $15, the new budget line will
a. move inward and be parallel to the old budget line.
b. move outward and be parallel to the old budget line.
c. move outward and become steeper.
d. move inward and become flatter.
e. move outward and become flatter.

5. An individuals preferences over meals (M) and books (B) are represented by the utility
function U(M,B) = 12M1/4B3/4. According to the MRS, whats the maximum number of
meals the individual would be willing to give up to obtain one more book, if the individual
currently has 4 meals and 3 books?
a. 9/4
b. 4/9
c. 1/4
d. 4

6.
Bundle
A
B
C
D

Food
5
15
10
8

Clothing
8
6
7
10

Bundles A and B are on the same indifference curve. If preferences are complete, transitive,
monotonic and convex, then:
a. C is preferred to both A and B.
b. B is preferred to D.
c. C is on the same indifference curve as A and B.
d. A is preferred to B.
e. None of these are correct.

7. An individual has preferences represented by the utility function: (, ) = (2 5).

How many of the following statements are TRUE concerning her marginal rate of
substitution of x for y?
If the individual has 10 units of x and 10 units of y, she would be willing to trade a
maximum of 4/3 units of y to get 1 additional unit of x.
If the individual has 3 units of x and 4 units of y, she would be willing to trade a
maximum of 2 units of x to get 1 additional unit of y.
If the individual has 2 units of x and 4 units of y, she would be willing to trade a
maximum of 3 units of y to get 4 additional units of x.
a.
b.
c.
d.

0
1
2
3

8. Which of the following utility functions is consistent with an individual who always likes
more of good x1 , but always dislikes more of good x2 ?
a. U(x1, x2 ) x1
1
b. U( x1, x2 ) 3
x1x2
c. U(x1, x2 ) (3x1 x2 )2
d. U(x1, x2 ) min( x1, 4x2 )
e. None of the above

9. Mahnaz has preferences that can be described by the following utility function:
(, ) = 3 2 1/3 . Mahnaz likes X and likes it _________ the more she consumes.
Mahnaz dislikes Y and dislikes it _________ the more she consumes. Her indifference
curves slope _________ at _________ rate.
a. more and more; less and less; upward; an increasing
b. less and less; more and more; downward; an increasing
c. more and more; less and less; upward; a decreasing
d. less and less; more and more; upward; a decreasing
e. less and less; more and more; downward; a decreasing

10. Something happened to make an individuals indifference curves change as indicated below.
Which of the following might have happened? In every case, please assume the individual
only cares about consuming the goods.
Before

After

a. Good A is a bundle of t-shirts and Good B is a single t-shirt. The manufacturer started

putting fewer t-shirts in a bundle.

b. Good A is a seasons worth of basketball tickets and Good B is a single-game basketball

ticket. The length of the season increased.

c. Good A is a subway token and Good B is a subway pass (it takes different amounts of

tokens and passes to ride the subway). The price of a subway pass decreased.
d. Good A is an envelope and Good B is a stamp (it requires envelopes and stamps to mail an

item). The price of stamps increased.

Long Form Questions

1.

Dilbert spends his entire income of $50 a month on hours of internet access (H) and slices
of pizza (P). Draw his budget constraint for each of the following situations. Please use a
separate graph for each part and label all axes and intercepts.
a.
The price of pizza is $1/slice and the price of internet access is $5/hour. (3 points)
b.
The price of pizza is $1/slice. The internet service provider charges the following
rates: (4 points)
i.
First 3 hours:
$1/hour
ii.
Next 6 hours:
$2.50/hour
iii.
All hours thereafter $4/hour
c.
The price of pizza is $1/slice. The internet service provider charges a fixed
monthly fee of $20 for service to begin and then $2/hour of service. (4 points)
d.
The price of pizza is $1/slice. Dilbert subscribes to an internet provider that
offers unlimited internet access for a flat fee of $20 per month. (4 points)
e.
The price of internet access is $1/hour. The price of pizza is buy 2 slices at a price
of $5/slice and get one free. (That is, for every 2 slices Dilbert buys, he gets one
more for free.) (4 points)

2.

In the field of financial management, it has been observed that there is a trade-off
between the rate of return that one earns on investments and the amount of risk that one
must bear to earn that return. Consider the rate of return to be a good. For each of the
following scenarios, sketch three indifference curves for risk and return. Label your
curves as IC1, IC2, and IC3, where U1 < U2 < U3.
a. Draw a set of indifference curves between risk and return for a person that is risk
averse (a person that does not like risk), where the marginal utility of return is
decreasing and the marginal disutility of risk is increasing (risk is getting worse and
worse). (3 points)
b. Draw a set of indifference curves for a person that is risk neutral (a person that does
not care about risk one way or the other). Assume the marginal utility of return is
decreasing. (3 points)
c. Draw a set of indifference curves for a person that likes risk and experiences
diminishing marginal utility for both risk and return. (3 points)
d. Draw a set of indifference curves for a person that likes a little risk but dislikes a lot
of risk. When risk is a good its marginal utility is diminishing. When risk is a
bad its marginal disutility is increasing (risk is getting worse and worse). Assume
that the marginal utility of return is everywhere decreasing. (4 points)
e. Draw a set of indifference curves for a person that dislikes risk initially, but learns to
like it at some point. When risk is a bad its marginal disutility is decreasing (risk is
getting less and less unappealing). When risk is a good its marginal utility is
increasing. Assume that the marginal utility of return is constant. (4 points)

3.

Consider the following utility functions:

U(x,y) = 3x - 5y2
U(x,y) = x1/3y2/3
U(x,y) = x1/2 + y1/3
U(x,y) = x2 + y3
For each utility function, answer the following questions:
a. Do both goods exhibit nonsatiation? Justify. (8 points)
b. Do both goods exhibit diminishing marginal utility? Justify. (8 points)
c. What happens to the MRS as we move to the right along a given indifference curve?
(8 points)