ECON UN3211 - INTERMEDIATE MICROECONOMICS

Columbia University - Department of Economics

Spring 2024
Problem Set 4 - Solutions

1. For each of the following utility functions below, for good 1, derive and draw the demand curve, x1 (p1 ),
and the Engel curve, x1 (m)
1/3 2/3
(a) u(x1 , x2 ) = x1 x2
Solution: We know from the previous problem set and from lecture notes, that x∗1 = 1m
3 p1 (You
1m
should still verify this on your own). Thus, the demand function is x1 (p1 ) = 3 p1 (where m is given)
1m
and it is depicted below. The Engel curve is x1 (m) = 3 p1 (where p1 is given) and it is depicted
below.
p1 m

Demand curve Engel curve

slope : 3p1

x1 x1

(b) u(x1 , x2 ) = x21 + x22

M Ux1 2x1 x1
Solution: The |M RS| is equal to M Ux2 = 2x2 = x2 , which is increasing in x1 and decreasing in x2 .
Thus, MRS is not diminishing. The solution will be a corner solution.
If p1 > p2 , spend all income on x2 , that is, x∗1 = 0.
If p1 = p2 , then the optimal bundle is either (x∗1 = 0, x∗2 = m
p2 ) or (x∗1 = m ∗
p1 , x2 = 0).
If p1 < p2 , spend all income on x, that is, x∗1 = m
p1 .

p1 m m m
Demand curve Engel curve Engel curve Engel curve
p1 > p2 p1 < p2 p1 = p2

p2

slope : p1
m/x1 = p1
slope : p1
m = p 1 x1
m = p 1 x1

m/p2 x1 x1 x1 x1

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 (c) u(x1 , x2 ) = 2x1 + 3x2
Solution: Note that this is a perfect substitute case. |M RS| is constant and equal to 2/3. Thus
p1
If p2 < 32 , then x∗1 = m
p1 .
p1
If p2 = 32 , x∗1 ∈ [0, pm1 ].
p1
If p2 > 32 , x∗1 = 0.

p1 m m m
Engel curve Engel curve Engel curve
3p1 > 2p2 3p1 < 2p2 3p1 = 2p2
Demand curve

2p2 /3

m/x1 = p1 slope : p1
m = p 1 x1 slope : p1
m = p 1 x1

3m/2p2 x1 x1 x1 x1

1/2
(d) u(x1 , x2 ) = x1 + 2x2
−1/2
M U x1 1/2(x1 ) 1
Solution: |M RS| is given by M U x2 = 2 = 1/2 . This is diminishing as x1 goes up. Then,
4x1
1 p1 p2 2
tangency implies 1/2 = p2 , which gives x1 = ( 4p1
) . If m is large enough, the demand will be
4x1
p2 2
x1 = ( 4p 1
) , otherwise it will be x1 = m/p1 . Thus we have
p22 p2 2
If m ≥ 16p1 , x∗1 = ( 4p1
) .
p22
If m < 16p1 , x∗1 = m
p1 .

p1 p1 m

Demand Demand
if m ≥ p2 2
16p1
if m < p2 2
16p1
Engel

p22
16p1

p2 2 m
x1 = ( 4p 1
) x1 = p1

x1 x1 p2 2
( 4p ) x1
1

2. Suppose a consumer spends all of her income on only two goods, x and y. Her preferences over these two
goods are represented by the utility function u(x, y) = min{2x + y, x + 3y}. Let px and py denote the
prices for good x and good y respectively. Consumer has an income m.

(a) Draw the demand curve for good x, for py = 1 and m = 100.
Solution: When x > 2y, we have 2x + y > x + 3y, thus u(x, y) = x + 3y and the |M RS| = 1/3.
When x < 2y, we have 2x + y < x + 3y, thus u(x, y) = 2x + y and the |M RS| = 2. Therefore, the
indifference curves are as in the graph below.

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 px
Given py = 1 and m = 100, the optimal x demand depends on the price ratio, which is py = px .

If px > 2, then the price ratio is larger than the |M RS| of the upper portion of the indifference
curves, thus the budget line is steeper than the upper portion of the indifference curves. Then the
optimal bundle is a corner solution with all income spent on y. Thus, x∗ = 0 for any px > 2.

If 2 > px > 1/3, then the price ratio is between the two |M RS| values of the upper and lower
portions of the indifference curves. Then the optimal bundle is at the kink of an indifference curve.
Thus, x∗ = 2y ∗ . Inserting this into the budget line, we get px x + py y = 100, we get px x + x
2 = 100,
that is, for any px with 2 > px > 1/3, we have

200
x∗ =
1 + 2px

If 1/3 > px , then the price ratio is smaller than the |M RS| of the lower portion of the indifference
curves, thus the budget line is flatter than the lower portion of the indifference curves. Then the
optimal bundle is a corner solution with all income spent on x. Thus, for any 1/3 > px we have

100
x∗ =
px

Finally let’s consider the prices 2 and 1/3:

If px = 2, then the price ratio is equal to |M RS| of the upper portion of the indifference curves, thus
the budget line overlaps with the steeper/upper portion of the indifference curves. Then any bundle
on the upper portion of the corresponding indifference curve will be optimal. Thus, for px = 2,
optimal x∗ ranges between 0 and the value at the kink, 200
1+2px at px = 2, which makes the latter 40.
Thus, x∗ ∈ [0, 40] for px = 2.

If px = 1/3, then the price ratio is equal to |M RS| of the lower portion of the indifference curves, thus
the budget line overlaps with the flatter/lower portion of the indifference curves. Then any bundle
on the lower portion of the corresponding indifference curve will be optimal. Thus, for px = 1/3,

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optimal x∗ ranges between the value at the kink, 200
1+2px and the corner solution at 100
px . Thus, at
px = 1/3, optimal x∗ ranges between 200
1+ 32
= 120 and 100
1 = 300. Thus, x∗ ∈ [120, 300] for px = 1/3.
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See the graph below for each of these prices and price ranges.

Now, if we put all these together to find the demand curve x∗ (px ), we get the following graph.

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(b) Draw the Engel curve for good x, for px = 2 and py = 3.
Solution: When prices are px = 2 and py = 3, the price ratio is 2/3 which is between the two
|M RS| values of the upper and lower portions of the indifference curves. Then the optimal bundle
is at the kink of an indifference curve. Thus, x = 2y. Inserting this and the prices into the budget
line, px x + py y = m, we get 2x + 3y = m, that is, 4y + 3y = m, which gives y ∗ (m) = m
7. Thus,
x∗ (m) = 2m
7 , which gives the Engel curve in the graph below.

(c) Draw the Engel curve for good x, for px = 1 and py = 3.

Solution: When prices are px = 1 and py = 3, the price ratio is 1/3 which overlaps with the
flatter/lower portion of the indifference curves. Then, for a given m, any bundle on the lower
portion of the corresponding indifference curve will be optimal, x ranges from the the optimal x at
the kink to the corner solution where all income spent on x. To find the value at the kink, again
insert x = 2y into the budget line at prices px = 1 and py = 3, and we get x + 3y = m, that is
2y + 3y = m, that is y ∗ (m) = m
5 and x∗ (m) = 2m
5 . The corner solution is given by x∗ (m) = m
px = m.
Thus, for any given m, we get x∗ ∈ [ 2m
5 , m]. This gives the Engel curve in the graph below.

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3. Determine in the following scenarios whether the good in question is a normal good for sure, an inferior
good for sure, or whether one cannot tell from the information given.

(a) When Justin was a graduate student with very low income in NYC, he always ate burritos from a
food truck for lunch. Now Justin has graduated and has a well-paying job in Toronto, where burritos
from food trucks are cheaper than they were in NYC. Justin eats far fewer burritos now even though
he has just as much time for lunch, his preferences haven’t changed, the burritos are just as good
and the lunch alternatives are more or less the same. For Justin, what kind of good are food truck
burritos?
Solution: Burritos have gotten cheaper relative to other lunch alternatives, and so the substitution
effect alone must be positive. However the total effect is observed to be negative (since Justin now
eats fewer burritos), meaning the income effect must be negative. Since Justin now has a higher
income (in two senses!–Justin has a higher income in nominal terms and also has a higher real
income due to the decrease in the price of burritos), the income effect being negative means that
the burritos must be an inferior good.
(b) In his grad student days, Justin hardly ever bought himself a lemonade, let alone buying lemonade
for others. Now, when he comes back to visit NYC, it’s quite possible to see him buy entire rounds
of lemonades, even for strangers. The price of lemonade in NYC has not changed, nor have Justin’s
preferences. For Justin, what kind of good is lemonade?
Solution: Essentially nothing has changed here except for Justin’s income. Since an increase in
income has led to an increase in his consumption of lemonade, lemonade must be a normal good.
(c) Since Justin got his job in Toronto, the Canadian dollar (the currency in which Justin is paid his
salary) has been becoming increasingly more valuable relative to the U.S. dollar. Because Justin
visits the U.S. quite often, it is as easy for him to shop for clothes in either country. Lately, he has
been doing more and more of his clothes shopping in the U.S. The price tags have not changed in
either country, and the clothes Justin buys are the same kind in both countries. For Justin, what
kind of good are clothes?
Solution: The question is asking about clothes in general, not clothes in one particular country.
Therefore, all we are really observing is that Justin is choosing to buy clothes from the cheaper place
(the U.S.) rather than the more expensive one (Canada). This tells us nothing whatsoever about
income effect. Rather, it tells us Justin is good at understanding the exchange rate and wants to
buy identical things for less rather than more. While this leads us to believe that Justin is normal,
we cannot say anything about whether clothes are normal or not.