Question

True/False Questions.

For each question below, please answer “true” or “false” and explain why. An answer without an explanation will result in no credit.

2. (5 points) Max Gross has the utility function U(x,y) = max⁡{x, y}. If the price of x is the same as the price of y, Max will buy equal amounts of x and y.

3. (5 points) Charlie’s utility function is U(x,y) = xy^2. His marginal rate of substitution between x and y does not change if the amount of both goods doubles.

4. (5 points) In economic theory, the demand for a good must depend only on income and its own price and not on the prices of other goods.

Answer 1

2. False

Since preferences are concave in nature, utility maximization problem will have a corner solution, Hence consumer will consumer either x or y which ever is maximum. However if P_x = P_y =P

From budget constraint, we get:

Max will buy either

3. True

Marginal rate of substitution

If amount of both goods double,

(Remains unchanged)

4. False

Demand for a good also depends on the price of other goods in case of substitutes and complements.