3. Returning to problem 3 on Homework 2 in which Emma is endowed with (i.e., starts off with) 160gallons of milk and 100 apples, suppose at the original prices pm = $2 and pa= $1 she chooses toconsume 120 gallons of milk and 180 apples.0Draw her budget set and equilibrium consumption bundle (including the maximal indifferencecurve).b. Show that if pm were to increase, she would end up better-off. Explain why.a.4. Consider a consumer whose utility function isu(x, y)=√xy (MRS(x, y) =)Xa. Assume the consumer has income $120 and initially faces the prices px= $1 and py=$1. How much xand y would they buy? Draw the budget constraint and the demands.b. Next, suppose the price of x were to increase to $4. How much would they buy now? Draw this in thesame figure.c. Decompose the total effect of the price change on demand for x into the substitution effect and theincome effect. That is, determine precisely how much of the change is due to each of the componenteffects. (Hint: See the lecture notes for the two properties that determine the location of "-", thereference point for distinguishing the income and substitution effects.)1

The objective of the question is to understand the consumer's behavior in response to changes in…

Answered: 3. Returning to problem 3 on Homework 2…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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4. Tim wants to maximise his utility given his utility function of U (A, B) = A² B¹. He faces the following prices and income: PA = 25; PB = 20; M = 250. However, a change in the price of good A to PA 22 will change his optimal bundle. If he is only interested in being able to consume his original bundle of goods, how much income would he need after the price change? = (a) Tim would require £54 less income (b) Tim would require £18.33 more income (c) Tim would require £10 less income (d) Tim would require £16.66 more income (e) Tim would require £16.66 less income
B.3 Marie has preferences over two goods, cake q₁ and bread q2. She chooses quantities to consume so as to best satisfy these preferences subject to the budget constraint p1q1 + P292 y where p₁ and P2 are prices and y is total budget. Suppose that Marie's preferences are represented by utility function u(q1, 92) = 91 + In (bq1 +92) where b≥ 0 is a preference parameter. Assume that p1/bp2 ≥ y/ (P1 - bp2) ≥ 1. (a) Show that Marie's indifference curves are downward sloping and that her weakly preferred sets are convex for all possible values of b. (b) Show that her Marshallian demand for cake gi is Y fi (y, P1, P2) 1 P1-bp2 and find her Marshallian demand for bread, f2 (y, P1, P2). Discuss the shape of Engel curves for the two goods. (c) Explain why Marshallian demand curves for normal goods slope down. Are there any values of b for which either cake or bread could be a Giffen good for Marie? Discuss. (d) Find the form of the indirect utility function and expenditure function and hence…
Lucas has $40 per week that he can spend on lemon soda (X) and chips (Y). The price of the lemon soda (PX) is $2 per bottle, and the price of the chips (PY) is $4 price Write down Lucas’s budget constraint. Draw the budget constraint on the graph below. Make sure to indicate the intercepts and the slope of budget constraint. Label it as BC1. Provide an economic interpretation of the slope of the budget constraint BC1 Suppose Lucas’s income decreases to $12 per week, and the price of lemon soda and chips remain the same. Write down Lucas’s new budget constraint. Then draw his new budget constraint on the same graph above. Make sure to indicate the intercepts and the slope. Label it as BC2. Suppose Lucas’s income remains to be $40 per week and the price of chips remains the same, but the price of lemon soda (PX) increases to $5. Write down Lucas’s new budget constraint. Then draw his new budget constraint on the same graph above. Make sure to indicate the intercepts and the…
Emily is a utility maximizer. Her income is $100, which she can spend on cafeteria meals and on notepads. Each meal costs $5 and each notepad costs $2. At these prices Emily chooses to buy 16 cafeteria meals and 10 notepads. a) Draw a diagram that shows Emily’s choice using an indifference curve and her budget line, placing notepads on the vertical axis and cafeteria meals on the horizontal axis. Label the indifference curve, I1, and the budget line BL1. Make sure you calculate the endpoints of the budget constraint. b) The price of notepads falls to $1; the price of cafeteria meals remains the same. On the same diagram, draw Emily’s budget line with the new prices and label it BL2. c) Lastly, Emily’s income falls to $90. On the same diagram, draw his budget line with this income and the new prices and label it BL3. Is she worse off, better off, or equally as well off with these new prices and lower income than compared to the original prices and higher income?
3. Juliette spends $48 each month on Oreo cookies (which cost $2 per package) and salt and vinegar chips (which cost $3 per bag). a) Suppose that the price of chips falls to $2 per bag and Juliette increases her chip consumption to 8 bags each month. Draw Juliette's new budget constraint and indicate her chosen bundle with an appropriately drawn indifference curve. Label her utility-maximizing bundle with the letter B. (Be sure to determine the right quantities of both chips and Oreos!) -LJ-J-1. IIII IIII J-L--- -1-1-L -LJ-J- 1- --+-+ --1-1 - IIII ת - ד -ר IIII III I IIII IIII L -1-L----1-1-L-- L--L- -LJ-J-1- IIII -LJ-J- 1- IIII IIII -+--- --+-+
34) Suppose that left shoes and right shoes must be purchased separately. Ingrid needs an equal number of each type of shoe and has a budget of $100 for shoes. Left shoes always cost $1. If right shoes cost $19 each, how many of each will Ingrid buy? If the price of right shoes increases to $49 each, how will Ingrid react? Explain your answer by drawing the indifference curves-budget lines. 35) Johnny has $100 to spend on books and all other goods. Books cost $20 each and Johnny is at equilibrium consuming 3 books and $40 worth of other goods. Johnny's grandmom wants to give Johnny either a book or $20 for his birthday. Which gift does Johnny prefer? Explain using an indifference map and budget lines.

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