Problem Set No.
1 Microeconomics Winter Term 23/24
Microeconomics - Problem Set No. 1
Cf. slides ’I: Consumer behavior’ and [P+R 2017], Ch.3, mostly.
1. Matt earns 100€ per month. He spends his monthly budget only on fries F and beef jerky
B and pays PF = 2 for a unit of fries and PB = 5 for a unit of beef jerky.
(a) Write down Matt’s budget constraint.
(b) What is the maximum amount of fries Matt can consume given his budget? What
about beef jerky?
(c) Draw Matt’s budget line. Determine its slope and interpret your result economically.
(Please put fries on the horizontal axis).
(d) Now, consider the three consumption bundles
i. (f1 , b1 ) = (30, 6),
ii. (f2 , b2 ) = (20, 12) and
iii. (f3 , b3 ) = (10, 20).
Add them to your drawing and explain relating to Matt’s budget constraint and/or
budget line!
(e) Because of Mad cow disease, the price of beef jerky rises to PB = 10. Draw Matt’s
new budget line and explain what has changed! (Does the price change induce a
parallel shift of the budget line and if not, can you imagine a situation when this
would happen?)
2. Mike likes Austrian dishes, especially dumplings X in quantity x and goulash Y in quantity
y . His individual utility from consuming these food items is
U (x, y) = 3xy 0.5 .
(a) Sketch indifference curves for U1 = 6 and U2 = 9 indicating the direction of higher
utility! (Find an expressions of the form y(x) for the indifference curves, first!)
(b) Are Mike’s better sets (strictly) convex? Can you find a graphical explanation for
your answer?
(c) Can you conclude what shape Mike’s utility function will have from your finding
in b)? What does this imply about Mike’s utility and his added utility from extra
dumplings?
For week of Oct 24, 2023 1 C. Salim, P. Schweinzer, N. Wohlgemuth
Problem Set No.1 Microeconomics Winter Term 23/24
(d) Compute Mikes marginal rate of substitution M RSx,y in general! Which values does
it take for a combination of dumplings and goulash of (x1 , y1 ) = (2, 4) and (x2 , y2 ) =
(1, 9)?
(e) Does Mike’s utility satisfy the property of ’diminishing marginal rate of substitution’.
Show graphically and briefly explain what the M RSx,y implies about his consumption
of both goods?
3. For the following set of goods and described preferences,
• draw two indifference curves I1 and I2 for utility levels U1 and U2 where U2 > U1 .
(Indicate the direction in which utility is increasing and don’t forget to label the axes!)
• What is the relationship between the two goods?
(a) A consumer likes to use sugar or sweetener and consumes a pound of sugar or a
pound of sweetener with equal satisfaction.
(b) Ann likes coffee and cookies for tea-time and likes exactly two cookies with her cup
of coffee. Interestingly, she would not have cookies without coffee, nor coffee without
cookies but can consume an almost infinite amount, as long as she can get two cookies
for each cup of coffee.
(c) Bernie is offered nuts and ice-cream. He likes ice-cream, but consuming nuts does
not make him happier or unhappier than consuming none of them.
(d) A consumer likes apples but hates liver (i.e. the more liver he consumes, the unhappier
he gets). Yet, consuming an extra two apples will (sort of) ’neutralize’ consuming an
extra unit of liver.
4. Now reconsider Mikes consumption of dumplings X and goulash Y assuming that Mike’s
individual utility from consuming these food items has changed to
U (x, y) = 4x − 4y.
(a) Sketch indifference curves for U1 = 4 and U2 = 8 into a new diagram indicating the
direction of higher utility from consumption!
(b) Does Mike’s utility satisfy the property of ’local non-satiation’ for dumplings and
goulash each? Explain briefly.
(c) Which consumption bundle will maximize Mike’s utility if he can spend 9€ in total
and dumplings cost PX = 1 and goulash PY = 2?
For week of Oct 24, 2023 2 C. Salim, P. Schweinzer, N. Wohlgemuth
