MANAGERIAL ECONOMICS Instructor: Dr. Mehmet A. Soytas Homework Assignment 2 Due Date: 16.11.2011 Question 1: The slope of the budget constraint is given as the ratio of the relative prices of the two goods. Therefore, a proportional change in the prices does not a¤ect the slope. Given that the price ratio remains same, individual chooses a new bundle just proportionally increasing (decreasing) the amounts of each good purchased at the previous prices if the prices decrease (increase). Do you agree with the above statement? Please explain your reasoning (with graphical representation if necessary). Question 2: A very important result we obtained during the lecture is the following: M RS = Why is this condition so important? Question 3 Suppose you observe three people in the market. Each chooses di¤erent combinations of the bundles formed of goods F and C as follows: Individual 1 chooses (5,5) with a budget 100. Individual 2 chooses (7,2) with a budget 80. Individual 3 chooses (6,6) with a budget 120. You have the following functions which characterize the individuals preferences Ui = ai F + 2i C i = 1; 2; 3 PF PC

a) You are given the information that the utility individual 1 gets from consuming her bundle is 20. What can you say about the coe¢ cients of the model, a1 , a2 , a3 ? b) What about the utilities of individual 2 and 3? c) Suppose you are not given the information in a (the utility of individual 1), but the information that price of F is twice the price of C. What can you say about the coe¢ cients of the model, a1 , a2 , a3 ? d) How your response to c changes if all you know is the price of good F and the information that the bundles (2,2) and (3,1) are on the same indi¤erence curve for individual 1? e ) From the result in d, can you say anything about the price of C? Question 4 Suppose you are the marketing manager of XYZ company and you o¤er the following baskets as a new product to the individuals in the market : (5,5), (9,1), (10,0). a) You...

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