Review session for Midterm #1

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Chapter 4 <strong>Review</strong> Questions4.2. The utility function that Ann receives by consuming food F and clothing C is given by U(F,C) = FC + F.The marginal utilities of food and clothing are MU F = C + 1 and MU C = F. Food costs $1 a unit, andclothing costs $2 a unit. Ann’s income is $22.a) Ann is currently spending all of her income. She is buying 8 units of food. How many units of clothingis she consuming?3. If Ann is spending all of her income then…F + 2C= 228 + 2C= 22(Simply plugging in what we know to the Budget Line)2C= 14C = 7b) Graph her budget line. Place the number of units of clothing on the vertical axis and the number ofunits of food on the horizontal axis. Plot her current consumption basket.Remember: Use the Budget Line and set P y to zero to find horizontal intercept and P x equal tozero to find the vertical intercept.1210Clothing864200 5 10 15 20 25 30 35Foodc) Draw the indifference curve associated with a utility level of 36 and the indifference curve associatedwith a utility of 72. Are the indifference curves bowed in toward the origin?Yes, the indifference curves are convex, i.e., bowed in toward the origin. Also, note thatthey intersect the F-axis.8
80Clothing706050403020100U=72U=360 5 10 15 20 25 30 35Foodd) Using a graph (and no algebra), find the utility‐maximizing choice of food and clothing. That is, findthe intersection of the budget line and the indifference curves.80Clothing706050403020100U=72U=36Optimum at F=12, C=50 5 10 15 20 25 30 35Foode) Using algebra, find the utility maximizing choice of food and clothing.The tangency condition requires thatMUFP =F (where slope of BL equals slope of IC)MUCPCPlugging in the known in<strong>for</strong>mation yields9
Page 1 and 2: EconS 301 ‐ REVIEW EXERCISES FOR
Page 3 and 4: dQ = 10000 − 100P + 99P + 10000
Page 5 and 6: JellyU 1U 22124Peanut Butter3.15. C
Page 7: Y450400350300250200150100500U 2U 10
Page 11 and 12: y(10,6)(20,12)(5,3)4.7. Helen’s p
Page 13 and 14: all of his regular income on hambur
Page 15 and 16: ) Calculate his income and substitu
Page 17 and 18: c) Determine the numerical size of
Page 19 and 20: 5.28 Consider Noah’s preference f
Page 21 and 22: AP and MP with K=12001000000500000A
Page 23 and 24: Q = min(aK,bL)= min(λaK,λbL)= λm

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