ECON 4140 Lecture : Econ2300 Study Guide

2) Define the following terms and give an example:

a) Pareto efficiency

b) Pareto inefficiency (Discuss why it is inefficient)

c) Ordinal Utility

d) Cardinal Utility (Discuss why this is rarely used)

e) Monotonic Transformation (example below)

f) Necessary good

g)Luxury good

h) Giffen goods

i) Marginal Rate of Substitution

j) Suppose I have a function f(x1, x2) = √ x1 + √ x2 . Using this function provide two examples of monotonic transformations and two examples of 1 transformations that are not monotonic.

What is marginal utility? What is the marginal rate of substitution? What is the relationship between total utility and marginal utility? What is the relationship between marginal utility and the marginal rate of substitution?

The consumer is choosing between two goods- good1 and good2. Good 1 is priced at $2 and good 2 is priced at $3. The consumer has a total of $600 to spend on both the goods.

1. Let the utility function of the consumer be U (X1, X2) = X1^(1/2)X2^(1/2).

a) Calculate the Marginal rate of substitution.

b) Calculate the optimal consumption bundles.

2.Let the utility function of the consumer be U (X1, X2) = X1^(1/4)X2^(3/4).

a) Calculate the Marginal rate of substitution.

b) Calculate the optimal consumption bundles.

3. Let the utility function of the consumer be U (X1, X2) = X1+X2.

a) Calculate the Marginal rate of substitution.

b) Calculate the optimal consumption bundles.

4. Let the utility function of the consumer be U (X1, X2) = 2X1+3X2.

a) Calculate the Marginal rate of substitution.

b) Calculate the optimal consumption bundles.

5. Let the utility function of the consumer be U (X1, X2) = Min (X1, X2)

a) Calculate the Marginal rate of substitution.

b) Calculate the optimal consumption bundles.

6. Let the utility function of the consumer be U (X1, X2) = 2X1 + X2².

a) Calculate the Marginal rate of substitution.

b) Calculate the optimal consumption bundles.

7.Let the utility function of the consumer be U (X1, X2) = X1*X2

a) Calculate the Marginal rate of substitution.

b) Calculate the optimal consumption bundles.