ADVANCE MICROECONOMICS Chapter 2: Utility and Choice Q1: Suppose a person has RM 8.

00 to spend only on apples and oranges. Apples cost RM0.4 each and oranges cost RM 0.1 each. Suppose person has preferences for apple (A) and orange (O) given by:
U tility = A O

a. If A=5 and O=80, what will utility be? b. If A=10, what values for O will provide the same utility as in part a? If A=20, what values for O will provide the same utility as in part a? c. Graph the indifference curve implied by part a and part b. d. Graph the budget constrain. e. Graph the utility-maximizing situation. Q2: Paul derives utility only from CDs and DVDs. His utility function is:
U tility = C D

a. Sketch Pauls indifference curves for U=5, U=10, U=20 and U=30 b. Suppose Paul has RM 200 to spend and that CDs cost RM5 and DVDs cost RM20. Graph Pauls budget constraint. c. Show the highest utility that Paul can achieve with his RM 200 and he will buy 5 DVDs. Suppose Pauls roommates object to his music choice and require him only buy equal number of CDs and DVDs. d. Given Pauls RM 200 income, how much of each will be buy? What is his utility? e. Suppose Pauls roommates wish Paul to accept their restrictions voluntarily. How much extra income would they have to give him to do so? Q3: Linda is a poor undergraduate student who has only RM 300 a month spend on food. She has read in a government publication that she can assure an adequate diet by eating only peanut butter and carrots in the fixed ratio of 2 pounds of peanut butter to 1 pounds of carrots. a. If peanut butter costs RM 4 per pound and carrots cost RM 2 per pound, how much can she eat during the month? b. Suppose peanut better cost rise to RM 5 because of peanut subsides introduced by the government. How much will Linda have to reduce her food purchases? c. How much in food stamp aid would the government have to give Linda to compensate for the effect of peanut subsidy? d. Graph the Lindas preferences

Tutorial Class 3 Chapter 3 (individual demand) Q1: Elizabeth earns RM 400 a week at her summer job and spends her entire income on shoes and jeans. She buys the same number of pairs of shoes and jeans in any give week. a. If jeans cost RM 20 and shoes cost RM 20, how many will Elizabeth buy of each? b. Graph the budget constraints. c. Draw Elizabeths indifference curve. d. How many pairs of jeans will she choose to buy if jeans prices are RM 30, RM 20, RM 10 and RM 5? e. Graph her demand curve for jeans f. Suppose that her income rise to RM 600. Graph her demand curve for jeans in this new situation. g. Suppose that the price of shoes rises to RM 30 per pair and her income is RM 400. How will this affect the demand curves? Q2: David gets RM 6 per month as an allowance to spend any way he pleases. He spends the entire amount on peanut butter (at RM 0.05 per ounce) and jelly (at RM 0.10 per ounce). David makes his sandwiches with exactly 1 ounce of jelly and 2 ounce of peanut butter. a. How much peanut butter and jelly will David buy with his RM 6 allowance in a week? b. Suppose the price of jelly were rise to 0.15 per ounce. How much of each commodity would be bought? c. By how much should Davids allowance be increased to compensate for the rise in the price of jelly? d. Graph your result. e. Discuss the results of this problem in terms of the income and substitution effects involved in the demand for jelly. Q3: The Jones family spends all its income on food and shelter. It derives maximum utility when it spends three-fourth of income on shelter and one-fourth on food. a. Use this information to calculate the demand functions for shelter and food. b. Show that demand is homogeneous with respect to changes in all price and income. c. Graph the demand curve for shelter and food for the Jones family if family income is RM 20,000. d. Show how the demand curves for shelter and food would shit if income rose to RM 50,000.