1. What is the difference between ordinal utility and cardinal utility? Explain why theassumption of cardinal utility is not needed in order to rank consumer choices!2. Can you explain why taking a monotonic transformation of a utility function doesn'tchange the marginal rate of substitution?3. Assume that Rossi consumes only bananas and avocado. Fortunately, she likes both goods.The consumption bundle where Rossi consumes xl units of bananas per week and x2 units ofavocado per week is written as (x1, x2).(a) In fact, Rossi's preferences can be represented by the utility function u(x1, x2) =4/x1 + x2. The price for bananas is $1 per unit and the price for avocado is $2 perunit. Rossi has $24 to spend on the two goods. Write down Rossi's budget constraintand solve for her optimal consumption bundle.(b) Now Rossi has $10 more to spend on the two goods ($34 in total), and what is heroptimal consumption bundle now? Compare your solution with the previous one. Canyou say anything interesting?

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1. What is the difference between ordinal utility and cardinal utility? Explain why the assumption of cardinal utility is not needed in order to rank consumer choices!

ENGR.ECONOMIC ANALYSIS

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Chapter1: Making Economics Decisions

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Question

1. What is the difference between ordinal utility and cardinal utility? Explain why the
assumption of cardinal utility is not needed in order to rank consumer choices!
2. Can you explain why taking a monotonic transformation of a utility function doesn't
change the marginal rate of substitution?
3. Assume that Rossi consumes only bananas and avocado. Fortunately, she likes both goods.
The consumption bundle where Rossi consumes xl units of bananas per week and x2 units of
avocado per week is written as (x1, x2).
(a) In fact, Rossi's preferences can be represented by the utility function u(x1, x2) =
4/x1 + x2. The price for bananas is $1 per unit and the price for avocado is $2 per
unit. Rossi has $24 to spend on the two goods. Write down Rossi's budget constraint
and solve for her optimal consumption bundle.
(b) Now Rossi has $10 more to spend on the two goods ($34 in total), and what is her
optimal consumption bundle now? Compare your solution with the previous one. Can
you say anything interesting?

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