ECON2101

SQ1
Due by December 14, 2018, 23:55 Sydney time
Aleksandra Balyanova

Instructions: Complete all questions. Show working for all parts. Answers do not have
to be integers: assume all variables (goods, prices) are infinitely divisible. Submit answers in
PDF format.

1. Nikki loves to collect accessories, namely boots (good x) and hats (good y). Her
preferences over bundles (x, y) containing boots and hats can be represented by
u(x, y) = xa y 1−a , where 1 > a > 0. The price of a hat is $25; the price of a
pair of boots is $75, and Nikki’s income is $375. Nikki also has limited closet space:
she has 10 units of space in her closet, and hats and pairs of boots each take up 1 unit
of space.

(a) Write down Nikki’s space constraint and her money constraint.
(b) If Nikki chooses the bundle (4, 3), it must be that a = .
(c) If Nikki chooses the bundle (1, 9), it must be that a = .
(d) Suppose Nikki has decided that given her preferences and the constraints she
faces, the optimal bundle for her is (1, 9). Before making the purchase, however,
Nikki discovers that her roommate has stolen some money from her. She can still
afford (1, 9) despite the theft, but would this still be her chosen bundle? Explain
in no more than 2 sentences.

2. Alice cares about two things: how much leisure time she has (x1 ) and what mark she
gets on tomorrow’s Micro exam (x2 ). Her preferences between these goods can be
represented by the utility function:

u(x1 , x2 ) = x1 + x2

Alice has 16 hours of today to distribute between studying and relaxing (she sleeps the
other 8). Studying positively affects Alice’s mark up to a certain point, but if she tries
to cram too much studying into one day, she will get tired and do worse on tomorrow’s
exam. Where s represents the hours Alice spends studying, the relationship between
her mark and s is as follows: √
x2 = a s − s

where a > 0.

1
(a) Suppose a = 6. At what level of s does continuing to study negatively affect
Alice’s mark?
(b) Suppose a = 6. Write down Alice’s constraint: the relationship between x1 and
x2 that holds if Alice uses all her 16 hours for either leisure or studying.
(c) Suppose a = 6. Find Alice’s optimal choice of x1 and x2 .
(d) For what values of a is Alice’s optimal choice a boundary solution in which she
spends all 16 hours studying?