1. Rajesh and Priya consume two goods, apples (A) and mangoes (M). Now suppose that Rajesh's utility function is U*(A, M) = 0.2 In(A) + 0.8 In(M) and Priya's utility funtion is UP (A, M) = 0.8 In(A) + 0.2 In(M).The economy as a whole is endowed with 100 apples and 50 mangoes. Assume for simplicity that the price of apple is normalized to PA = Rs. 1. (i) Solve for the marginal rates of substitution between apples and mangoes for Rajesh and Priya, and show the condition that represents Pareto efficient allocation in apples and mangoes. (ï) Now calculate Rajesh and Priya's demands for A and M as a function of Prices P and Income I. (iii) Assume that Rajesh has 80 apples and 10 mangoes. Using Rajesh and Priya's respective MRS between the two goods, and the given societal endowment, solve for the equilibrium price ratio. Calculate the quantities consumed by each individual in equilibrium. Draw the equilibrium in an Edgeworth Box diagram, making sure to label the equilibrium point and price vector.

1. Rajesh and Priya consume two goods, apples (A) and mangoes (M). Now suppose that Rajesh's utility function is U*(A, M) = 0.2 In(A) + 0.8 In(M) and Priya's utility funtion is UP (A, M) = 0.8 In(A) + 0.2 In(M).The economy as a whole is endowed with 100 apples and 50 mangoes. Assume for simplicity that the price of apple is normalized to PA = Rs. 1. (i) Solve for the marginal rates of substitution between apples and mangoes for Rajesh and Priya, and show the condition that represents Pareto efficient allocation in apples and mangoes. (ï) Now calculate Rajesh and Priya's demands for A and M as a function of Prices P and Income I. (iii) Assume that Rajesh has 80 apples and 10 mangoes. Using Rajesh and Priya's respective MRS between the two goods, and the given societal endowment, solve for the equilibrium price ratio. Calculate the quantities consumed by each individual in equilibrium. Draw the equilibrium in an Edgeworth Box diagram, making sure to label the equilibrium point and price vector.

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter6: Consumer Choice And Demand

Section: Chapter Questions

Problem 2QFR

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The budget set, or budget constraint, in the graph shows the possible combinations of brownies and ice cream cones that can be purchased. Assume that this person has a total of $18 to spend on brownies and ice cream cones. How much does a brownie cost? $ Assume that at point A, the marginal utility from a brownie is 10 and the marginal utility for an ice cream cone is 18. This person is utility maximizing. should consume more brownies and fewer ice cream cones. should consume more ice cream cones and fewer brownies. Brownies 18- 16- 14- 12- 10- 8- 6- 4 2. 0 1 2 3 1 A 1 + 4 5 Budget constraint 6 7 8 9 10 11 12 13 14 Ice cream cones
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