Question

3. Consider the following utility function: U = min{25 x1, 20 x2} Also, consider the following bundles A= (4, 5) B=(6, 2) C=(7, 4) D=(3, 6) E=(2, 9) Which of the following bundles is on the corner of the IC?

A

B

C

D
E

8. Consider the following utility function:

U = 5 x1 + 2 x2

Also consider the following bundles:

A=(6, 6)       B=(8, 4)       C=(4,11)      D=(7, 9)     E=(9, 3)

If x1=20, how much of x2 does the consumer has to consume to obtain a utility level of 150?

50

900

170

25

9.

Which of the following better explains why marginal utility decreases?

		The total satisfaction from consuming a good falls as more of the good is consumed.
		Marginal utility falls as total utility falls.
		The quantity of a good demanded falls as its price rises.
		The additional satisfaction from consuming a good falls as more of the good is consumed.
		There is a direct relationship between the price of a good and its total utility.

Answer 1

3. A
U = min{25 x1, 20 x2}
Bundle on the corner of the IC is that where 25x1 = 20x2
So, at A= (4, 5), 25x1 = 25(4) =100 and 20x2 = 20(5) = 100
Thus, this bundle is on the corner.

8. 25
U = 5 x1 + 2 x2 = 150
So, 5(20) + 2x2 = 150
So, 2x2 = 150 - 100 = 50
So, x2 = 50/2 = 25

9. The additional satisfaction from consuming a good falls as more of the good is consumed.
(This explains why marginal utility falls. As additional satisfaction declines so marginal utility is falling)