Microeconomics Answers

A person’s utility function is of the form U(x,y) = 5xy. The prices of good x and y are P_x = $4 and P_y = $2, respectively. The person’s income is $1200.

(a) Show that these preferences are homothetic?

(b) What quantities of x and y should the consumer purchase to maximize his

utility?

(c) Determine the person’s income offer curve (IOC). Draw it.

(d) Explain whether each of the two goods is normal or inferior.

(e) Derive the Engel curve for x. Draw it.

The fundamental problem in economics is

4. A college student has two options for meals: eating at the dining hall for BDT 6 per

meal, or eating a Star Kabab for BDT 1.50 per meal. Her weekly food budget is BDT

60.

a. Draw the budget constraint showing the trade-off between dining hall meals and Star

Kabab. Assuming that she spends equal amounts on both goods, draw an indifference

curve showing the optimum choice. Label the optimum as point A.

b. Suppose the price of a Star Kabab now rises to BDT 2. Using your diagram from part

(a), show the consequences of this change in price. Assume that our student now spends

only 30 percent of her income on dining hall meals. Label the new optimum as point B.

c. What happened to the quantity of Star Kabab consumed as a result of this price change?

What does this result say about the income and substitution effects? Explain.

d. Use points A and B to draw a demand curve for Star Kabab. What is this type of good

called?

Maximize:

U = alog(X) + (1 − a)log(Y )

subject to:

I = P_X X + P_Y Y

1. Find X* and Y* using the method of Lagrange multipliers.

2. Can we derive the demand function of X and Y in a general form, e.g:

X = f (P_X , I)andY = f (P_Y , I).

3. Please make some conclusions about the demand derived from the

utility function.

4. Note: a special case, please solve the same problem if U=XY.

Plot price on y axis and Quantity on x axis an determine what is the slope (positive or negative)

Price 1 2 3 4 5

Quantity 12 28 42 52 60

classify the following statements as positive or normative

a. Firms are showing positive response to increase in demand of product.

b. Decision of a worker to work lessdue to lower wages.

c. Government legislation is targeting firms charging too high prices.

 Please explain why the risk-averse customers purchase insurance. (1 point)

 Please draw a graph to show their risk premium. (1 point)

Afghanistan reported its first COVID-19 case on February 24, 2020. As the infection spread, the government tightened containment measures, including introducing screening at ports of entry, quarantine for infected people, and closure of public places for gathering. In May, it waived electricity bills of less than Af 1,000 (US$13) for a family residence in Kabul for two months. The decision benefited more than 1.5 million Kabul residents.

 Please draw a graph using budget line and indifference curve to indicate the subsitution effects and income effects for the families in Afghanistan after the government waived electricity bills. Assumed that there are two goods: electricity and other goods and services.

(2 points)

 Shortly explain if the electricity is normal goods or inferior goods. (1 point); and the sign of total effects is negative or positive? (1 point)

A normative statement is a statement regarding

An increase in demand for notebook raises the quantity of notebooks demandes but not the quantity supplies is the statement true or false? Explain.