ECN 312 – Intermediate Microeconomic Theory: Consider the following utility function which specifies Eli’s preferences over two goods Xylophones (X) and Yo-Yos (Y ).

Problem Set 1
originally due 01/31/2019 at the start of class
EXTENSION: NOW DUE 02/05/2019 at the start of class
ECN 312 – Intermediate Microeconomic Theory
intercepts, and all points relevant to the question. Explain your work thoroughly in
order to receive full credit. Possible points are given in parentheses.
1. (25) Consider the following utility function which specifies Eli’s preferences over two goods, Xylophones (X) and Yo-Yos (Y ). (Please note that we call this type of utility function quasi-linear.)
U(X; Y ) = 10pX + 20Y
(a) (5) What is the marginal utility of X? Label your answer MUX and draw a box around
around your answer. What is the marginal rate of substitution of X for Y ? Label your
simplified answer MRSX;Y and draw a box around it.
(b) (5) What is the slope of the indifference curves when X = 4 and Y = 1? Label your answer
(c) (5) What is the slope of the indifference curves when X = 1 and Y = 1? Label your answer
(d) (10)Start at the bundle described in (c) where X = 1 and Y = 1. How does the slope of the
indifference curves change when we increase X while holding Y fixed at 1? In two sentences
or less, describe your answer in terms of Eli’s willingness to give up Y for X. Include an
argument as to why this intuitively makes sense.
2. (25) Rebecca is just starting a two-day, fully-funded vacation. First thing this morning, she
is given \$1000. First thing tomorrow morning, she is given \$500. This is all the money that
however, save her money overnight in a savings account that pays 10% interest per day. She will
spend all of her money while on vacation.
(a) (5) Plot and label Rebecca’s endowment (the bundle she starts off with) in the space of
consumption today (C1) and consumption tomorrow (C2). Put C1 on the horizontal axis.
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(b) (10) On a new set of axes, plot and label the point indicating the maximum amount of consumption that Rebecca can get today. Plot and label the maximum amount of consumption
that Rebecca can get tomorrow. Use these points, along with the endowment from (a), to
draw Rebecca’s budget line and label its slope.
(c) (5) Suppose that Rebecca’s preferences are given by the following utility function:
U(C1; C2) = C1 + 2C2
What is Rebecca’s marginal rate of substitution given these preferences? How does this
marginal rate of substitution change as she gets more C1? Explain in two sentences or less.
(d) (5) Suppose that Rebecca’s preferences are instead given by the following utility function:
U(C1; C2) = C10:5C20:5
What is Rebecca’s marginal rate of substitution given these preferences? How does this
marginal rate of substitution change as she gets more C1? Explain in two sentences or less.
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