Consumer Theory

Bilkent University ECON107 Principles of Microeconomics Homework 3 deadline: April 2nd 13:30, in person before class (Make sure to provide all the necessary explanations to your solutions in order to get full credit.) (Make sure that your homework submissions are up-to-par with academic standards.) 1. (40 points) Consider the indifference curves, potential budget lines and potential consumption bundles of the consumer below. a. (5 points) Rank these bundles from most to least preferred. b. (5 points) Find the marginal rate of substitution of good 2 for good 1 at bundle (4.3, 4.2). c. (10 points) If the income of the consumer is 24 TL and the prices of good 1 and good 2 are 2 TL/unit and 4 TL/unit, what is the optimal bundle for this consumer? d. (20 points) Suppose the price of good 1 increases to 4 TL/unit. How much does the consumption of good 1 change? How much of this is due to the income effect? How much is due to the substitution effect? 1 2. (20 points) Which property of the preferences is violated by the indifference curves below (the arrow shows the direction of preferred bundles)? Explain. a) b) 3. (40 points) Fill in the blanks for a firm for which the cost of labor is w = 6 TL/worker and cost of capital is r = 5 TL/unit. Is this firm being analyzed in the short or the long run? Do not forget to show your work. L 0 1 2 3 4 5 6 7 K 2 2 2 2 2 2 2 2 Q 0 2 5 9 14 17 19 20 MPL APL FC VC 2 TC MC AFC AVC ATC