Peter's preferences over two goods, x and y, are represented by the utility function u(x, y) = y + 2x. a) Peter is currently consuming bundle A = (2,4) with 2 units of good x and 4 units of good y. Calculate his current level of utility from consuming this bundle. b) Write the expression the indifference curve representing Peter's current level of utility (i.e., the one you found in part (a). Next draw this indifference curve. c) By looking at the indifference curve you drew in part (b), answer the following questions: • Does Peter like good x? Good y? Explain. What can you say about the marginal rate of substitution of good x for y, MRSxy? Is it positive? Negative? Constant? Increasing? Decreasing? Interpret/explain your answer in terms of the tradeoffs Peter is willing to make between goods to keep the same utility level.

Peter's preferences over two goods, x and y, are represented by the utility function u(x, y) = y + 2x. a) Peter is currently consuming bundle A = (2,4) with 2 units of good x and 4 units of good y. Calculate his current level of utility from consuming this bundle. b) Write the expression the indifference curve representing Peter's current level of utility (i.e., the one you found in part (a). Next draw this indifference curve. c) By looking at the indifference curve you drew in part (b), answer the following questions: • Does Peter like good x? Good y? Explain. What can you say about the marginal rate of substitution of good x for y, MRSxy? Is it positive? Negative? Constant? Increasing? Decreasing? Interpret/explain your answer in terms of the tradeoffs Peter is willing to make between goods to keep the same utility level.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Peter's preferences over two goods, x and y, are represented by the utility
function u(x, y) = y + 2x.
a) Peter is currently consuming bundle A = (2,4) with 2 units of good x and 4 units of good
y. Calculate his current level of utility from consuming this bundle.
b) Write the expression the indifference curve representing Peter's current level of utility (i.e.,
the one you found in part (a). Next draw this indifference curve.
c) By looking at the indifference curve you drew in part (b), answer the following questions:
Does Peter like good x? Good y? Explain.
What can you say about the marginal rate of substitution of good x for y, MRSxy?
Is it positive? Negative? Constant? Increasing? Decreasing? Interpret/explain your
answer in terms of the tradeoffs Peter is willing to make between goods to keep the
same utility level.
d) On the same graph you drew in part (b), draw the indifference curve for a utility level of
10. Plot and label in the graph bundles B = (1,2), C = (1,6), and D = (2,6). Next,
indicate (using the corresponding notation) how Peter would rank bundles A, B, C and D.
e) What if Peter's utility function would be u(x, y) = y 2x, instead? Repeat the analysis
done in parts (b) and (c).

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