Information Economics with Real Estate Applications

Solutions to the exercises

Chapter 1

• 1.1

  1. If we fix the utility level to U, then an indifference curve is given by

     $$\overline{U}=x_1+x_2\iff x_2=\overline{U}-x_1.$$

     Hence, an indifference curve is a straight line in the x₁-x₂-plane with slope −1.

     

  2. In the case of a linear utility function, the solution will be a corner solution, i.e. the individual will consume zero of one good, and put the whole income in buying the other good. Since U(x₁,x₂) = x₁ + x₂, the utility is equal to the sum of the consumed goods and the apartment buyer will choose to only consume the cheaper good. Since p₂ = 2p₁, this is good 1. It follows that the apartment buyer will ...