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Economics 1011 Section 12

Fall, 2022

Practice with the Golden Rule of consumer’s demand theory

1a. Write out the golden rule for a consumer who purchases some amounts of goods X, and Y to be maximizing utility and memorize it.

1b.Write out the golden rule for a consumer who purchases some amounts of goods X, Y, and Z to be maximizing utility and memorize it.

2a. Assume that the price of X = PX = _ 10__, price of Y = PY =__20__, and price of Z = PZ = ____5__. A consumer named αlpha who buys the three goods to maximize utility will set:

MUX/MUY =_______ ; MUX/MUZ = _________ and MUY/MUZ = ___________ αlpha is willing to trade one unit X for _____units Y or for ____units Z

2b. Assume that another consumer, βeta, faces different prices such that PX = _6___, PY               =___9____, and PZ = __4___.   If this consumer who buys the three goods to maximize utility

will set: MUX/MUY =________;  MUX/MUZ = ________ and MUY/MUZ = __________ βeta is willing to trade one unit X for ________units Y or for _______units Z

2c. If αlpha and βeta meet.  Consider the two goods X and Y.    Based on the results above, _____________ will trade X to _____________ in exchange for Y.

2d.l Again if αlpha and βeta meet.  Consider the two goods X and Z.    Based on the results

above, __________ will trade X to __________ in exchange for Z.

3a. If good X is changing so that alpha’s total utility is rising, then alpha’s marginal utility of X is ________________

1.   Equal marginal utility principle… . If prices of X and Y are equal, PX = PY, and the          consumer buys 5 units of X, then the consumer must buy ___________ units Y to equate marginal utilities of X and Y.

2.   If PX = 2PY and consumer alpha buys 5 units of X, then the consumer must buy __________ units of Y to maximize utility.

3.   If 2PX = PY and consumer alpha buys 5 units of X, then alpha will buy __________ units of Y to maximize utility

4.   If PX = 2PY and consumer alpha buys 3 units of X, then the alpha will buy __________ units of Y to maximize utility.

5.   If the alpha buys 6 units of X and 4 units of Y, then the marginal rate of substitution of y for x = ____________(read approximately from the graph)

6.   If another consumer, beta,  buys 9 units of X and 6 units of Y, then the marginal rate of substitution of y for x = ____________ (read approximately from the graph)

7.   If the consumers in questions 5 and 6 meet and can trade, the alpha in problem 5 will      exchange good ________ to beta from problem 6 in exchange for good _________. Any idea what the rate of voluntary exchange will be?