Question 1: The utility function of a consumer is u(x₁,x₂)=x₁x₂². The consumer's endowment is (2,2).

• Assume prices are p₁=p₂=1. Determine the optimal consumption choice.
• Is the consumer a net buyer or net seller of good 1?
• Assume the price of good 1 increases to 4. Determine the optimal consumption choice.
• Is the consumer better off, or worse off, or equally well off after the price increase?

Question 2: The utility function of a consumer is u(x₁,x₂)=x₁x₂. The endowment is (4,2).

• Find prices at which the consumer will not trade.
• Show by means of a graph that any change away from these prices will make the consumer strictly better off.

Question 3:

• Graph an example where the net buyer of good 1 is worse off if p₁ increases by a "small amount" but is better off if the price increase is "sufficiently large".
• Find a similar example where a net seller of good 1 is worse off if the price of the good decreases by a small amount but is better off if the price decreases by a large amount. What is the intuition?

Question 4: Solve question 9.1 from the workbook (except (e)).

Question 5: Solve question 9.3 from the workbook.

Question 6: Solve question 9.11 from the workbook.

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