Problem Set 1

Economics 310-2
-

Names of team members:

Points
Graded Questions

/12

Other questions

/6

Procedural

/2

Total
Plus 1 point will be added for completing a survey that will be emailed out during the rst week.

Guidelines In General

You are encouraged (though not required) to submit assignments in groups of two to three. Each
group will submit the same assignment, and receive the same score.

You are also encouraged to work (though not submit) in even larger groups.

I only ask that

you help each other out in person, and never give or ask for completed assignments to look at.
Asking for or receiving physical copies of a problem set is considered a violation of expectations.

Show your work, and box any nal answers. More generally, try to make life easy for the grader:
Wanton messiness may cause you to lose a procedural point.

Guidelines if you submit a hard copy

Please attach this rst sheet to the front of your problem set, and make sure to staple all the
sheets together, in order.

Write on only one side of each sheet, and start each new problem (clearly labeled) on the top of
a new sheet.

Guidelines if you submit a hard copy

We are going to experiment with a new method of submitting problem sets. If you choose this
method and feel that everything has gone smoothly and that your images are crisp then there is
no need to submit a hard copy. If you have any doubts that submit a hard copy as well though
also circle below if you have submitted an electronic version as well.

CIRCLE HERE if you have submitted an electronic version as well.

Pareto Eciency for Dan, Jorge, and Matteo (Problems 1, 2,

and 3)
Dan, Jorge, and Matteo share an oce. They face all sorts of social choice problems, such as how to
place a fridge, what poster to put on the door, and how to split free-food bounties.

1 Door Poster
There is space for exactly one poster on the door, and the options are a Bears poster, and Cubs poster,
and a Fire poster.

The set of feasible alternatives is thus

A = {B, C, F }.

Each oce-mate has a

dierent set of preferences:

C D B D F
F J C J B
F M B M C
(a)

What is the set of Pareto ecient alternatives if we consider only Dan? (Don't over think this
one.)

(b)

Dan and Jorge?

(c)

All three?

2 Fridge Location
The oce is pretty narrow, and can be modeled by a line 5 meters in length. Dan's desk is 1 meter
from the window, Jorge's is 2 meters away, and Metteo's is 2.2 meters.
where to place a new mini-fridge, with the feasible alternatives being
notation for this interval is just

[0, 5].

They are trying to decide

A = {x | 0 x 5} .

A shorter

Dan and Jorge want to be as close to the fridge as possible since

they eat a lot of food in the oce. Matteo is disgusted by the smell that emanates from the fridge,
and thus wants to be as far away as possible. Their utilities can thus be written

uD (x) = |x 1|
uJ (x) = |x 2|
uM (x) = |x 2.2|

only

(a)

What is the set of Pareto ecient alternatives if we consider

(b)

What is the set of Pareto ecient alternatives if we consider both Dan and Jorge?

(c)

How about if we consider all three oce-mates?

Dan?

Please make sure to explain your reasoning (clearly labeled diagrams never hurt).

Also, if you are

having trouble, just go point-by-point and ask the following question: Are there any other points in
the room that everybody would prefer to this point? If you think the answer is no then you probably
have found one Pareto ecient alternative. Also, remember that there are often many Pareto ecient
alternatives.

3 Free Food
Finally, the ocemates have come across some free food in the lounge. It consists of two slices of pizza
(denoted

x)

and 3 cans of coke (denoted

y ).

Let

xD

denote how much pizza Dan gets, and this can

have any non-negative real values (ie half slices of pizza allowed; coke can also come in non-integer
values). In the case in which we consider all three ocemates, the set of feasible alternatives actually
consists of 6 values, and can be written as follows, assuming we require that nothing be disposed of.

A = {(xD , yD ) , (xJ , yJ ) , (xM , yM ) |xD + xJ + xM = 2, yD + yJ + yM = 3 }

Dan wants as much free stu as possible, Jorge is quite particular and only enjoys a slice of pizza when
it comes with equal part soda (Perfect Complements) and Matteo just ate but could always use a
little more caeine:

uD = xD + yD
uJ = min {xJ , yJ }
uM = yM
(a)

Set of Pareto ecient alternatives with Dan only?

(b)

Dan and Jorge?

(c)

All three?

You almost surely should sketch a picture to aid yourself in solving this problem. In fact, your nal
answer can be a picture (especially for part (b)).
[If you are having trouble, you can instead assume that cans of coke and slices of pizza are indivisible
and thus the nal allocations have to be integer-valued. If you do this perfectly, full credit, though be
forewarned that you should get comfortable thinking about non-discrete problems.]

4 Convex Combinations
uXak

uY im

(a)

Finding the Pareto ecient allocations would be quite tedious without a graph: First plot the
utilities on an x-y plane. This is also tedious, but worth it.

(b)

Clearly list the Pareto ecient alternatives.

Try to use the graph that you just made to help

guide your search.

The set of feasible alternatives can be expanded to include

convex combinations :

Suppose Xak and

Yim could agree to a mixture of two (or more) alternatives. For example, maybe B is realized one
third of the time, and F two thirds of the time. Xak would place utility of 5 (weighted average of 3
and 6) on this mixture, while Yim would place utility o 3. These numbers are a weighted averages of
the utilities for B and F. Thus any point that falls on the line connecting B and F is now a feasible, at
least in terms of realized utilities. In light of this assumption, the set of Pareto ecient alternatives
can change.

(c)

Alternative B was Pareto ecient, but with convex combinations, it is no longer. A 50/50 mixture
of which two alternatives Pareto dominates B?

(d)

Among all (pure) alternatives, which remain Pareto ecient given the possibility of convex combinations? You want to think about this problem with your graph.

Return to ignoring the possibility of convex combinations:

(e)

Suppose there were a third person named Zed.

He has (complete and transitive) preferences

represented by a utility function, but you do not know what it is. In other words, there is a third
column of numbers that you cannot see. If we include Zed, will the number of Pareto ecient
alternatives (i) Not decrease and maybe increase; (ii) Not increase and maybe decrease; (iii)
denitely increase; (iv) denitely decrease; (v) not enough info to say anything? Briey explain.
[Hint: If you are having trouble thinking about this, just make up some numbers and see what
happens.]

Utility Maximization [Optional: Do not submit]

Use chapter 4 from the textbook as a guide if you are having trouble (this problem is actually one of
the practice problems in the textbook). If solving this problem is not straightforward based on your
studies in 310-1 then please be forewarned that the latter part of the course will require additional
preparation on your part.
Eric has monthly income of
price of

is

I = $800

and utility

(a)

Find Eric's optimal consumption bundle.

(b)

Find Eric's optimal consumption of good

just

U (x, y) = xy .

The price of

is

Px = $20

and the

Py = $40.

Px = $20).

x,

but with

Px unspecied (i.e., for all values of Px , not

x. Is Eric's demand for good x downward

This is Eric's demand curve for good

sloping?

(c)

Find Eric's optimal consumption bundle as a function of

(a), except with none of the given numbers.

I , Px ,and Py . In other words, repeat part