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ECON302 I NTERMEDIATE M ICROECONOMICS Final Study Guide December 6, 2015 Write your answers on a separate sheet of paper. B RIEFLY DEFINE THE...
A consumer has a Cobb-Douglas utility function u[x1,x2] = x11/2 x21/2 and faces a budget constraint p1x1+p2x2 = p1x¯1+p2x¯2.
a) What is theMarginal Rate of Substitution for this consumer?
b) If the consumer has an endowment of (x¯1 =5,x¯2 = 10) and prices are p1 = 2 and p2 = 1 what is the most preferred affordable bundle for this consumer?
c) What would happen to the consumer’s demand for x1 and x2 if there was a decline in p2 assuming the cross-price elasticity was positive?
d) If x1 is an inferior good describe what happens to demand for x1 for a change in income (m = p1x¯1+p2x¯2).
