ECOS2001 Intermediate Microeconomics
Tutorial 3
Chapter 6: Demand
Chapter 8: Slutsky Equation
Question 1
Mary’s utility function is ( ) 2U b,c =b+100c-c , where b is the number of silver bells in
her garden and c is the number of cockle shells. She has 500 square feet in her garden
to allocate between silver bells and cockle shells. Silver bells each take up 1 square
foot and cockle shells each take up 4 square feet. She gets both kinds of seeds for free.
(1) To maximize her utility, given the size of her garden, how many silver bells should
she plant? How many cockle shells should she plant?
(2) If she suddenly acquires an extra 100 squares feet for her garden, how much
should she increase her planting of silver bells? How much should she increase
her planting of cockle shells?
(3) If she had only 144 squares in her garden, how many cockle shells would she grow?
(4) If Mary grows both silver bells and cockle shells, the number of square feet in her
garden must be greater than ---?
Question 2
Assume that a consumer’s preferences are well behaved, and that there are two goods
(good 1 and 2). Holding price 2 and income constant, derive the demand curve for
good 1.
Question 3
Suppose we live in a world where there are just two goods to consume.
Can both of the goods be:
a. Normal?
b. Income inferior?
c. Ordinary?
d. Giffen?
Question 4
2
Nancy spends all her income on good 1 and good 2. As p1 increases while p2 remains
fixed, Nancy’s price-offer path is horizontal.
a. How does Nancy’s expenditure on good 1 respond to changes in p1?
b. Is good 2 a complement or a substitute for good 1?
Question 5
A perfect “Tequila Sunrise” requires 100 grams of tequila per 2 parts of orange juice
(fresh squeezed). pt is the price of 100 grams of tequila and po is the price of an orange.
Ingrid’s budget for drinks is $100 (she wants to spend the entire $100). How many
Tequila Sunrises will Ingrid consume? (Illustrate your answer with a graph.)
3
Additional Questions
(These questions will not be discussed during the tutorial)
Question 1
Define the Slutsky substitution effect and income effect. Using well behaved (convex
and monotonically increasing) preferences show each effect on a diagram for a: (i)
price fall; and (ii) a price rise. Provide intuition for your diagram
Question 2
Define the price-offer curve and, using a diagram, derive both a downward sloping
demand curve and a demand curve for a Giffen good.