Econ 301 F07

ANSWERS to PROBLEM SET 2 - due in class on Thursday September 20

Wissink
1. Critically evaluate the following statements and explain why or in what way are they true, false, or
uncertain.
a. Over the set of people in New York State, the binary relation "is the Facebook Friend of" is complete
and transitive.
[ANSWER] False, the binary relation is the Facebook Friend of is not complete and not
transitive.
Completeness: For example, take Jane and Mike who both live in NY and are not Facebook Friends
(FBF). So Jane is NOT Mikes FBF and Mike is not Janes FBF, or both, so the relation is NOT
complete. Transitivity: for example, Jane is the Facebook Friend of Mike. Mike is the Facebook
Friend of Carol. To be transitive, Jane MUST BE the Facebook Friend of Carol. But, in reality, Jane
may not be the Facebook Friend of Carol.
b. Assuming a 2 good commodity space and an agent with well behaved preferences, the binary
relation is strictly preferred to is complete.
[ANSWER] False, the binary relation is strictly preferred to is not complete. Suppose Bundle A
and Bundle B are indifferent to each other. Then A is not strictly preferred to B and B is not strictly
preferred to A, or both, so the relation is strictly preferred to it not complete.
c. Unlike Prof. Wissink, an indifference curve can never be thick.
[ANSWER] True, a well behaved indifference curve can never be thick. A thick indifference
curve violates the monotonicity assumption, which means that more is better. Suppose that (x1, y1)
is a bundle of goods and (x2, y2) is a bundle of goods with strictly more of both goods x and y. By
the monotonicity assumption, (x2, y2) is strictly preferred to (x1, y1). But if two bundles are on the
same thick indifference curve, (x2, y2) is indifferent to (x1, y1).

2. Draw indifference curve maps containing at least two indifference curves for the following
descriptions of preferences and indicate the direction in which happiness is increasing. (Note, not all
these individuals will have nicely behaved preference, in fact, maybe none of them do.)
a. Ima Slacker loves to go shopping for all other goods and dislikes working. She has strictly convex
preferences between all other goods and working.
b. James Bonds favorite drink is a Vodka Martini, shaken, not stirred. His personal perfect recipe is to
always use 1 part vodka to 3 parts gin.
c. Jane describes nirvana as exactly 1 piece of cheesecake with cup of raspberry sauce.
d. Mikko cares about road quality in Oulu Finalnd and could care less about road quality in Ithaca New
York.
[ANSWER]
(a)

(b)

(c)

(d)

Raspberry (cup)

IC1
1/4
IC0
0

Cheesecake (piece)

3. Al derives utility from 3 goods: music (M), wine (W), and cheese (C). His utility function is given
by: u(M,W,C) = MWC
a. Assuming Al's consumption of music is fixed at 10, sketch the indifference curves between W and C
for u = 400 and then again for u = 700 putting W on the horizontal and C on the vertical.
[ANSWER] So 400=10WC C=40/W is the equation for the indifference at u=400 and similarly,
C=70/W is the equation for the indifference at u=700.

b. Show that Al's MRS between wine and cheese falls as Al moves down and to the right along his
indifference curve.
[ANSWER] There are several ways you can prove this. The easiest in this case is to note that the
equation for the indifference curve is C=K/W where K is some constant depending on the level of
utility chosen as fixed. Now note that dC/dW = -K/W2 and that d2C/dW2 = 2K/W3 which is positive,
which means that the negative slope of the indifference curve is getting algebraically LESS
negative, i.e., flatter, which, in absolute value, means that the MRS is falling.
c. Suppose Al's consumption of music increases to 20. How would this change your answers to parts
(a) and (b)?
[ANSWER]
(a) part: New IC0 and IC1 shrink. Since Al consumes twice music, he consumes less wine and
cheese to keep the same utility.

(b) part: Als utility function when M=20, u = 20WC. Then, MUw = 20C and MUc = 20W. Als
MRS = C/W. Als MRS is the same as in (b). There is no change in the answer.
4. Calculate the marginal utility of x, (pu/px), the marginal utility of y, (pu/py), and the MRS for each
of the following utility functions. (Note: the p stands for a partial derivative.)
a. u = 2x + 3y c. u = 4x + 6y e. u = ax + by g. u = 2(x.5) + y
b. u = v(x) + y d. u = xy

f. u = xayb

i. u = ln(x) + y

k..u = xa + yb

h. u = (x+2)(y+1) j. u = (x+a)(y+b)

[ANSWER]
MUx

MUy

MRS

a. u = 2x + 3y

2/3

b. u = v(x) + y

pv(x)/px

pv(x)/px

c. u = 4x + 6y

2/3

d. u = xy

y/x

e. u = ax + by

a/b

f. u = xayb

axa-1yb

bxayb-1

(ay)/(bx)

g. u = 2(x.5) + y

x-0.5

x-0.5

h. u = (x+2)(y+1)

y+1

x+2

(y+1)/(x+2)

i. u = ln(x) + y

1/x

1/x

j. u = (x+a)(y+b)

y+b

x+a

(y+b)/(x+a)

k. u = xa + yb

axa-1

byb-1

(axa-1)/(byb-1)
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5. Which of the following utility functions represent the same underlying preferences:

u = 2x + 3y

z = 10 + 2ln(x) + 3ln(y)

v=

(2x + 3y)

g = 23 + 4x + 6y

w = x 2 + y3

h = -23 - 2x 3y

[ANSWER] The utility functions, u, v, and g represent the same preferences. Monotonic
transformations of the utility function, u, are v and g. Notice that the function, h has the same MRS as u.
But h is not a monotonic transformation of u.
Utility functions
(A)
u = 2x + 3y
v = (2x + 3y)
w = x2 + y 3
z = 10 + 2ln(x) + 3ln(y)
g = 23 + 4x + 6y
h = -23 - 2x 3y

A transformation of (A) p(B)/pu

(B)
(C)
v=

v` = > 0

g = 23 + 2u
h = -23 - u

g` = 2 > 0
h` = -1 <0

MUx

MUy

MRS

2
2(2x + 3y)
2x
2/x
4
-2

3
3(2x + 3y)
3y2
3/y
6
-3

2/3
2/3
(2x)/(3y2)
(2y)/(2x)
2/3
2/3

6. Suppose using empirical evidence that you discover

that a good approximation of the average U.S.
consumers indifference curve map over the two Food at
per
goods Clothing per year and Food per year is as home
year
illustrated below. What might you suggest is a
reasonable interpretation for such an
indifference curve map?

IC_3
IC_2
IC_1
Clothing per
year

[ANSWER]
One interpretation of this indifference curve map is that there are minimum levels of food and clothing
necessary to support life. The consumer cannot trade one good for the other if it means having less than
these critical levels. As the consumer obtains more of both goods, however, the consumer is
increasingly willing to trade between the two goods and they start looking more and more like perfect
substitutes for one another.

7. The Wissink kids, Gerrit, Christine and Greg are trying to decide where to go to dinner one night.
There are three choices: Hals Deli, Subway and Taco Bell. Gerrit says his ranking of the three, from
best to worst is: Hals, Subway and then Taco Bell. Greg's preferences are: Subway, Taco Bell, and then
Hals. Christine's preferences are: Taco Bell, Hals and then Subway.
a. Gerrit proposes they take each pair of alternatives and let a majority vote determine the family
preference ranking over each pair of alternatives. That is to say if A goes up against B, the
alternative with more votes is preferred to the other. Determine the family ranking over each pair of
alternatives based on Gerrit's proposal. Over the three alternative eateries, is this familys ranking
complete? Is this familys ranking transitive?
[ANSWER] Using majority voting over each pair of places we get: TB vs. H results in TB winning
(Christine and Greg vote for TB over H). So: TB is preferred to H. Now consider H vs. S and you
get: H is preferred to S. Now consider TB vs. S and you get that: S is preferred to TB. So the
family's preferences just cycle around and around with no un-dominated choice emerging (under this
method of majority rule). The family's ranking, however, is complete since we can always compare
any two eateries this way. The family's ranking IS NOT transitive since TB is preferred to H and H
is preferred to S but it is NOT true that TB is at least as good as S since S is preferred to TB..
b. Christine suggests that they first decide on Hals and Subway and then put the winner up against Taco
Bell. Is this a good suggestion? For whom?
[ANSWER] This is a great suggestion for Christine since they will get that H wins over S and then
when we put up H against TB they get TB as the winner! She gets her best alternative. Gerrit,
however, is none too pleased.

c. Greg argues that he should get to set the voting order. Why would he argue for that?
[ANSWER] The voting order matters for the familys ranking since the familys ranking is not
transitive. If Greg sets the voting order from the pair, (Hals Deli, Subway), his best, Subway, will be
decided.
d. Gerrit decides that if Christine is going to set the voting order, since she is the oldest and the oldest
always gets to set the order, then he is going to cheat. How might Gerrit cheat and if his assumption
that Greg and Christine won't cheat is correct, can be benefit from cheating?
[ANSWER] Suppose the first pair is Hals Deli and Subway. Gerrits worst is Taco Bell. If he votes
to Hals Deli on the first pair, the family decides Taco Bell at the end. However, the family decides
Subway if Gerrit votes to Subway instead of Hals Deli. Thus, he gets benefits from cheating.
8. Professor Goodheart always gives two midterms in his communications class. He only uses the
higher of the two scores that a student gets on the midterms when he calculates the course grade.
a. Nancy Lerner wants to maximize her grade in this course. Let x be her score on the first midterm
and let y be her score on the second midterm. Which combination of scores would Nancy prefer, (x
= 20 and y = 70) or (x = 60 and y = 60)?
[ANSWER] Nancy gets 70 with the combination of scores, (x = 20 and y = 70) and 60 with (x = 60
and y = 60). The score, 70, gives her the higher grade. Thus, she prefers (x = 20 and y = 70).
6

b. On a graph draw an indifference curve showing all of the combinations of scores that Nancy likes
exactly as much as (x = 20 and y = 70). Also draw an indifference curve showing the combinations
that Nancy likes exactly as much as (x = 60 and y = 60).
[ANSWER]

c. Does Nancy have convex preferences over these combinations?

[ANSWER] No, Nancy doesnt have convex preferences. Her indifference curves bow out away
from the origin. Suppose a convex combination of (20, 70) and (70, 20), (20+(1- )70, 70+(1)20). Let =0.5. Then the convex combination is (45, 45) which gives her 45 scores for grading.
If she has convex preferences, she prefers (45, 45) to (20, 70) and (70, 20). But she would prefer 70
scores from (20, 70) to 45 scores from (45, 45).
d. Nancy is also taking a course in economics form Professor Stern. Professor Stern gives two
midterms. Instead of discarding the lower grade, Professor Stern discards the higher one. Let x =
score on midterm 1 and let y = score on midterm 2. Which combination of scores would Nancy
prefer, (x = 20 and y = 70) or (x = 60 and y = 50).
[ANSWER] Nancy gets 20 score for grading from (20, 70) and 50 from (60, 50). She would prefer
(60, 50) to (20, 70).
e. On a graph, draw an indifference curve showing all of the combinations of scores on her econ exams
that Nancy likes exactly as well as (x = 20 and y = 70). Also draw an indifference curve showing the
combinations that Nancy likes exactly as well as (x = 60 and y = 50).
[ANSWER]

f. Does Nancy have convex preference over these combinations?

[ANSWER] Yes, Nancys ICs dont bow-out away from origin.
g. Can you suggest a utility function to use for Nancys communications class? And one for her
economics class?
[ANSWER]
A utility function for her communication class: u = max {x, y}
A utility function economics class: u = min {x, y}