Please Complete The Following Problems (1) For Each Of The
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Please complete the following problems (1) For each of the following expressions, state the formal assumption that is being made about the individual utility function: (a) It (margarine) is just as good as the high priced spread (butter). (b) Peanut butter and jelly go together like a horse and carriage (c) Things go better with Coke. (d) Popcorn is addictive – the more you eat, the more you want. (e) Mosquitoes ruin a nice day at the beach. (f) A day without wine is like a day without sunshine. (g) It takes two to tango.
(2) Each day Maggie eats lunch at work. She likes only chocolate and tea, and these provide her a utility of U(C, T) = C^.5*T^.5. (a) If chocolate costs $0.50 each and tea costs $1.25 per cup, how should Maggie spend the $5 her husband gives her each day in order to maximize her utility (note: this utility function is cobb-douglas you can find the MRS for this type of utility elsewhere)? (b) If the price of chocolate increases to $2.00, by much will her husband have to increase her allowance to provide her with the same level of utility she received in part (a)? How much chocolate and tea will Maggie buy now (assuming it is possible to purchase fractional amounts of both of these goods)?
(3) Indicate whether the following statements are True/False/Uncertain. Provide an explanation for your answer: (a) If the interest rate rises, you will consume less today. (b) Monica has a utility function u(w) = w^.5. Monica currently earns $90,000 per year. However, there is a 10% chance that some calamity will befall her and cost her $50,000. Monica is willing to pay $6500 to fully insure against this potential loss. (c) Team A has a 55 percent chance to beat team B. Even a risk averse consumer will place an even money bet on this game. (An even money bet is where you get amount X if you win and pay amount X if you lose.)
(4) Dave lives for two periods. In period one he earns Y1 and in period two he earns Y2. Dave’s utility function is U(C1, C2) = u(C1) + Bu(C2) (a) Write down Dave’s budget constraint. (b) If the interest rate is 5% and Dave’s discount rate is .8, does Dave consume more in period one or period two.
(5) Do problems 8.2, 8.3, 11.0, 11.9 from the workbook.
(2) Each day Maggie eats lunch at work. She likes only chocolate and tea, and these provide her a utility of U(C, T) = C^.5*T^.5. (a) If chocolate costs $0.50 each and tea costs $1.25 per cup, how should Maggie spend the $5 her husband gives her each day in order to maximize her utility (note: this utility function is cobb-douglas you can find the MRS for this type of utility elsewhere)? (b) If the price of chocolate increases to $2.00, by much will her husband have to increase her allowance to provide her with the same level of utility she received in part (a)? How much chocolate and tea will Maggie buy now (assuming it is possible to purchase fractional amounts of both of these goods)?
(3) Indicate whether the following statements are True/False/Uncertain. Provide an explanation for your answer: (a) If the interest rate rises, you will consume less today. (b) Monica has a utility function u(w) = w^.5. Monica currently earns $90,000 per year. However, there is a 10% chance that some calamity will befall her and cost her $50,000. Monica is willing to pay $6500 to fully insure against this potential loss. (c) Team A has a 55 percent chance to beat team B. Even a risk averse consumer will place an even money bet on this game. (An even money bet is where you get amount X if you win and pay amount X if you lose.)
(4) Dave lives for two periods. In period one he earns Y1 and in period two he earns Y2. Dave’s utility function is U(C1, C2) = u(C1) + Bu(C2) (a) Write down Dave’s budget constraint. (b) If the interest rate is 5% and Dave’s discount rate is .8, does Dave consume more in period one or period two.
(5) Do problems 8.2, 8.3, 11.0, 11.9 from the workbook.
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