Homework Help is Here – Start Your Trial Now!
Business
Economics
2) Suppose Kelvin receives RM400 allowance a month and he only spends on other goods and food. In the first year, the price of food is RM4 per kg and the price of other goods is RM1 per unit. His utility function is U-20√GF, where G represents other goods and F represents food. In the second year, prices of both commodities increased by RM1 each due to tax. a) Assuming Kelvin maximizes his utility subject to his allowance, how much food and other goods were consumed in the first year? b) In the second year, if his allowance did not increase, how will this affect his food, other goods consumption, and his utility? c) Suppose he received rebates that reflect the true cost of living (an inflation index that holds utility constant over time: ideal cost of living), what is his level of food and other goods consumption under this circumstance? How much compensation did he receive? d) If Kelvin was given a rebate such that he could still enjoy his bundle of goods in the first year, how much additional compensation should be given to Kelvin?

2) Suppose Kelvin receives RM400 allowance a month and he only spends on other goods and food. In the first year, the price of food is RM4 per kg and the price of other goods is RM1 per unit. His utility function is U-20√GF, where G represents other goods and F represents food. In the second year, prices of both commodities increased by RM1 each due to tax. a) Assuming Kelvin maximizes his utility subject to his allowance, how much food and other goods were consumed in the first year? b) In the second year, if his allowance did not increase, how will this affect his food, other goods consumption, and his utility? c) Suppose he received rebates that reflect the true cost of living (an inflation index that holds utility constant over time: ideal cost of living), what is his level of food and other goods consumption under this circumstance? How much compensation did he receive? d) If Kelvin was given a rebate such that he could still enjoy his bundle of goods in the first year, how much additional compensation should be given to Kelvin?

Microeconomic Theory
Microeconomic Theory
12th Edition
ISBN:9781337517942
Author:NICHOLSON
Publisher:NICHOLSON
Chapter6: Demand Relationships Among Goods
Section: Chapter Questions
Problem 6.9P
See similar textbooks
icon
Related questions
Question
2) Suppose Kelvin receives RM400 allowance a month and he only spends on other goods and food. In the first year, the price of food is RM4 per kg and the price of other goods is RM1 per unit. His utility function is U-20√GF, where G represents other goods and F represents food. In the second year, prices of both commodities increased by RM1 each due to tax. a) Assuming Kelvin maximizes his utility subject to his allowance, how much food and other goods were consumed in the first year? b) In the second year, if his allowance did not increase, how will this affect his food, other goods consumption, and his utility? c) Suppose he received rebates that reflect the true cost of living (an inflation index that holds utility constant over time: ideal cost of living), what is his level of food and other goods consumption under this circumstance? How much compensation did he receive? d) If Kelvin was given a rebate such that he could still enjoy his bundle of goods in the first year, how much additional compensation should be given to Kelvin?
Transcribed Image Text:2) Suppose Kelvin receives RM400 allowance a month and he only spends on other goods and food. In the first year, the price of food is RM4 per kg and the price of other goods is RM1 per unit. His utility function is U-20√GF, where G represents other goods and F represents food. In the second year, prices of both commodities increased by RM1 each due to tax. a) Assuming Kelvin maximizes his utility subject to his allowance, how much food and other goods were consumed in the first year? b) In the second year, if his allowance did not increase, how will this affect his food, other goods consumption, and his utility? c) Suppose he received rebates that reflect the true cost of living (an inflation index that holds utility constant over time: ideal cost of living), what is his level of food and other goods consumption under this circumstance? How much compensation did he receive? d) If Kelvin was given a rebate such that he could still enjoy his bundle of goods in the first year, how much additional compensation should be given to Kelvin?
Expert Solution
steps

Step by step

Solved in 2 steps

SEE SOLUTIONCheck out a sample Q&A here
Blurred answer
Recommended textbooks for you
Microeconomic Theory
Microeconomic Theory
Economics
ISBN:
9781337517942
Author:
NICHOLSON
Publisher:
Cengage
Microeconomics: Private and Public Choice (MindTa…
Microeconomics: Private and Public Choice (MindTa…
Economics
ISBN:
9781305506893
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Economics: Private and Public Choice (MindTap Cou…
Economics: Private and Public Choice (MindTap Cou…
Economics
ISBN:
9781305506725
Author:
James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:
Cengage Learning
Exploring Economics
Exploring Economics
Economics
ISBN:
9781544336329
Author:
Robert L. Sexton
Publisher:
SAGE Publications, Inc
Micro Economics For Today
Micro Economics For Today
Economics
ISBN:
9781337613064
Author:
Tucker, Irvin B.
Publisher:
Cengage,
Economics For Today
Economics For Today
Economics
ISBN:
9781337613040
Author:
Tucker
Publisher:
Cengage Learning
SEE MORE TEXTBOOKS