1) Draw indifference curves to represent the following types of consumer preferences.

On a graph with
the amount of peanut butter (P) on the horizontal axis and the amount of jelly (J) on the vertical axis, draw
two of indifference curves, U1 and U2, with U2 > U1.Write down a simple utility function that would
accurately capture to describe preferences. Note: [Answers may vary on the form of the utility function!]
a) A consumer likes both peanut butter and jelly, and she always gets the same additional satisfaction
from an ounce of peanut butter as she does from 2 ounces of jelly.

b) A consumer likes peanut butter, but she neither likes nor dislikes jelly.

c) A consumer likes peanut butter, but she dislikes jelly.

d) A consumer likes peanut butter and jelly, but she only wants 2 ounces of peanut butter for every ounce
of jelly.

e) A consumer likes both peanut butter and jelly. Her marginal rate of substitution of peanut butter for jelly
is diminishing.

2. Fill in the following table for each of the three utility functions in top row.

U=(X)0.5Y
MUX

MUY

Is MUX
diminishing?

MRSX,Y

Is MRSX,Y
diminishing?
Slope of an
indifference curve

Do the
indifference curves
intersect either
axis?
If so which axis?

U=X0.5 + Y

Week 2: Special Problems Session: Suggested Solutions:

1) In the following pictures, U2 > U1.

a)
Jelly
PD
4
2
U1

U2

Peanut Butter

One possibility: U(P,J) = J +2P

Another possibility: U(P,J) = 2J + 4P
Note: MUP = 2MUJ in either of the possibilities.
Slopes of the ICs are always -MUP /MUJ = - 2
b)
Jelly
U1

U2

PD

Peanut Butter

One possibility: U(P,J) = P Another possibility: U = P0.5

c)
U1

Jelly

U2

PD
Peanut Butter

One possibility: U(P,J) = P J

Another possibility: U(P,J) = 2P-J

d)
Jelly
U1

U2

P = 2J
2
1
2

One possibility: U(P,J) = min(J, P/2)

Peanut Butter

Another possibility: U(P,J) = min(2J, P)

Note that the :elbows of the ICs lie on the line P = 2J (or equivalently J = P/2)

e)
Jelly

U2
U1
Peanut Butter

One possibility: U(P,J) = (PJ)

0.5

Another possibility: U(P,J) = PJ

This possibilities illustrated are the standard Cobb-Douglas case. There are still other possibilities.

U=(X)0.5Y

U= X0.5 + Y

MUX

0.5Y / (X)0.5

0.5/( X0.5)

MUY

(X)0.5

Is MUX
diminishing?

Yes; (MUX falls as X

increases.)

Yes. (MUX falls as X

increases.)

MRSX,Y

0.5Y/X

0.5/( X0.5)

Is MRSX,Y
diminishing?

Yes; as X rises (and Y

falls) along an
indifference curve,
MRSX,Y decreases.

Yes; as X rises (and

Y falls) along an
indifference curve,
MRSX,Y decreases

Slope of an
indifference curve

-MRSX,Y = - 0.5Y/X

-MRSX,Y =

Do the
indifference curves
intersect either
axis?

No. Must have

positive amounts of
both X and Y to have
positive utility

If so which axis?

- 0.5/( X0.5)

Yes. Can have

positive utility when
consuming only X or
only Y. Every
indifference curve
intersects both axes.

Extra exercise: Can you draw indifference curves with the properties identified in the table?