In Cambridge, there are individuals from three different citizenships: Ethiopians, Brazilians, and Americans. Coffee is only sourced from Brazil and Ethiopia. Brazilians and Ethiopians only like to drink coffee from their own country, while for Americans a cup of coffee is the same regardless from its origin (Brazil or Ethiopia). All of them have the same level of income denoted byI

and

is some coefficient greater than0

.

What is a utility function for Americans?

a)UA(b,e)=be,>0

b)UA(b,e)=(be)2,>0

c)UA(b,e)=b+e,>0

d)UA(b,e)=0

e)None of the above

f)UA(b,e)=b,>0

g)UA(b,e)=e,>0

h)UA(b,e)=be,>0

2)What is the magnitude (i.e. the absolute value) of the marginal rate of substitution for Americans? (Suppose Brazilian coffee is on they-axis.)

3)What is a utility function for Brazilians?

a)UB(b,e)=b+e,>0

b)UB(b,e)=e,>0

c)UB(b,e)=(be)2,>0

d)UB(b,e)=be,>0

e)UB(b,e)=b,>0

f)None of the above

g)UB(b,e)=be,>0

h)UB(b,e)=0

4)What is the magnitude (i.e. the absolute value) of the marginal rate of substitution for Brazilians? (Suppose Brazilian coffee is on they-axis.)

5)What is a utility function for Ethiopians?

a)UE(b,e)=0

b)UE(b,e)=(be)2,>0

c)UE(b,e)=be,>0

d)None of the above

e)UE(b,e)=b,>0

f)UE(b,e)=be,>0

g)UE(b,e)=e,>0

h)UE(b,e)=b+e,>0

Problem E.2.

1)Continuing with the above coffee example, ifpb

a)E*=0,b*=I/Pb

b)None of the above

c)E*=I/Pb,B*=0

d)E*=I/Pb,B*=I/Pe

e)E*=I/Pe,B*=0

f))E*=I/Pe,B*=I/Pb

2)Ifpb

a)E*=I/Pb,B*=I/Pe

b)E*=0,B*=I/Pe

c)E*=0,B*=I/Pb

d)E*=I/Pe,B*=0

e)E*=I/Pe,B*=I/Pb

f)None of the above

g)E*=I/pb,B*=0

3)Ifpb

a)E*=0,B*=I/Pe

b)E*=I/Pb,B*=I/Pe

c)None of the above

d)E*=I/Pb,B*=0

e)E*=0,B*=I/Pb

f)E*=I/Pe,B*=I/Pb

g)E*=I/Pe,B*=0