AECO 300 Assignment 1
Class #: 5727
Instructor: Mingda Zhang
Due on Feb 18th Tuesday at the beginning of class
1. Draw the graph of the indifference curve maps for each scenarios. Put good X on x-axis
and good Y on Y-axis. Draw 3 indifference curves and labeled 1, 2 , and 3 , from the
highest to the lowest utility level. ( You don’t need specific numbers here, refer to “four
particular preferences” in the slides)
a. Good X is economic bad. For good Y, more is better.
b. Both of goods X and Y are economic bad.
c. Good X is useless good and good Y is economic bad.
2. Draw the graph of an indifference curve map for the utility function ( , ) = 2 .
Put good X on x-axis and good Y on Y-axis. Draw at least 3 indifference curves and label
the utility level for each indifference curve. Explain why or why not do the indifference
curves cross each other on the map.
3. Textbook page 77 Problem 2.3.
4. Textbook Page 77 problem 2.5.
5. ( , ) = 0.7 0.3 ,
= 0.7 −0.3 0.3
= 7 = 6
= 0.3 0.7 −0.7
= 84
(a) Calculate and simplify the expression of the marginal rate of substitution .
Does this rate diminish as x increases and y decreases?
(b) Write the budget constraint.
(c) What is the consumption bundle to maximize the utility level? What is the maximum
utility level?
6. Good X and good Y are complements. U(X, Y) = min (3X, 5Y). Price of X is $6 and
price of Y is $5. The total income is $90.
(a) Write the consumption ratio of good X and good Y.
(b) Write the budget constraint.
(c) What is the consumption bundle to maximize the utility level? What is the maximum
utility level?
7. (a) Assume good X is normal. Plot a graph to illustrate the income and substitution
effects of an increase in PX, holding PY and I constant.
(b) Now suppose X is a Giffen good. Plot a graph to illustrate the income and substitution
effects of an increase in PX, holding PY and I constant.
8. Textbook page 122 Problem 3.8.
9. Consider a linear demand curve, Q = 120 – 4P.
a) What is the price elasticity of demand at P = 20?
b) At what price is demand unit-elastic (i.e. elasticity = –1)?

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