ECON 301 Intermediate Microeconomics

1. Fully explain the economic problem facing the consumer and the two steps used in solving the problem.

2. Assuming diminishing marginal utility and an indifference curve with Apples on the X axis and Cheese on the Y axis, fully explain how the slope of the indifference curve measures the relative value of the goods to the consumer.

3. Assuming diminishing marginal utility, calculate Ted and Cindy's value of apples and cheese assuming that Ted's MRS =5/3 and Cindy's MRS=3/8. In addition, if the market price of apples were $2 and the market price of cheese was $3, describe how Ted's and Cindy's relative value of the goods would change.

4. Assuming that a consumer starts with a level of utility equal to U2, which is the maximum utility the individual can attain given her income of I2 and the relatives prices of x=Px1 and of y=Py1, graphically show the effects of a price increase of x using the indifference curve analysis. In addition, fully explain the concepts of compensating and equivalent variation and how they would be calculated in the above example.