3. Suppose that the price of eggs decreases to p'p = 1. Compute Bob's optimal choice of dumplings and eggs in this new situation. Find the budget m'g under which Bob's optimal choices under (pp, PE) = (0.1, 2) and mB = 9 (that you found in (2)) would be just affordable under (pp, P'e) = (0.1, 1) and budget m'g. Compute Bob's optimal choice of dumplings and eggs if his income were replaced by m'g and prices were (pp, P'E) = (0.1, 1). Use this to decompose the change in his consumption of both goods into the substitution and the income effects. Use this decomposition to argue whether eggs and dumplings are normal or inferior goods. %3D

3. Suppose that the price of eggs decreases to p'p = 1. Compute Bob's optimal choice of dumplings and eggs in this new situation. Find the budget m'g under which Bob's optimal choices under (pp, PE) = (0.1, 2) and mB = 9 (that you found in (2)) would be just affordable under (pp, P'e) = (0.1, 1) and budget m'g. Compute Bob's optimal choice of dumplings and eggs if his income were replaced by m'g and prices were (pp, P'E) = (0.1, 1). Use this to decompose the change in his consumption of both goods into the substitution and the income effects. Use this decomposition to argue whether eggs and dumplings are normal or inferior goods. %3D

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

Suppose the marginal utiliy of a Coke is 15 utils and the price is $1. The marginal utility of a pizza is 20 utils and its price is $2. If you buy 1 unit each will you achieve consumer equilibrium? If not how can greater total equilibrium be obtained?
Suppose you had a budget of $20.00 and the prices of a burger and a slice of pizza are $5.00 and $2.00 respectively. What would be your optimal consumption bundle?
Tony is throwing a party at his Fraternity and is trying to choose what booze to buy. A bottle of vodka has three times the alcohol as a six-pack of beer. Assume that Tony only cares about the total amount of alcohol in his basket. (use vodka on the X-axis and beer measured in six-pack on the Y-axis) a) Devise a utility function to represent these preferences. b) Suppose a bottle of vodka costs $40, a six-pack of beer costs $10, and the budget is $200. Write the budget constraint. c) Solve Tony’s utility maximization problem and find the optimal combination. d) Suppose that a bottle of vodka cost has increased to $50. What will be his new optimal combination.
Economics Summer break is approaching! Suppose you derive utility from days spent traveling on vacation domestically, D, and days spent traveling on vacation in a foreign country, F. Your utility function over these two “goods” is: U(D, F) : 4D0.25F 0.75 Let your budget constraint be I(D, F) = pDD + pF F; where I is your income, pD is the price of domestic travel per day, and pF is the price of foreign travel per day. a. Determine the demand functions for domestic travel and foreign travel. Make sure you show your work – show the steps used. b. Suppose that you’ve saved $800 for your summer travel, the price of domestic travel per day is $25 and the price of foreign travel per day is $100. How many days of each type of travel will you embark on? c. Illustrate the indifference curve, budget constraint, and the utility maximizing bundle associated with (b). Make sure you show the level of utility, the budget constraint intercepts, and the optimizing equilibrium. Your answer
Ellie spends £20 on Energy drink (E) and Juice (J). Her preferences for these goods can be described by the following utility function: U ( E,J) = 2E + J^2 ( J squared) - J (MUt = 2, MUj = 2J - 1) Suppose that one energy drink costs £1.60 while one carton of Ellie’s favourite Juice costs £4.00. a) Find Ellie’s optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning. b) Discuss how Ellie’s optimal consumption choice would change when her disposable budget changes. c) If the price of energy drinks increases to £2.00 per can, how should the price of Juice change so that Ellie can be as well off as before this change in prices? d) Discuss the implications of the price change from c) on Ellie’s optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Ellie’s demand for Energy drink and/or Juice.
While visiting family in Mexico, your professor has a budget of $ 255 ($ = pesos) that he spends on tacos and tequila. The price of tacos is $ 6 and a shot of tequila is priced at $ 16. During his visit the price of tacos changes to $ 5. Assume your professor has a Cobb-Douglas utility function with (tacos) parameter a = ( 27 / 100). How many shots of tequila does your professor purchase ? (Assume both goods are commodities.) (Answer is : 11.63)
The prices of good A and good B are $3 and $2 respectively. Theodore has a budget of $29 to alternate between the two. Currently, his consumption choices are 7 units of good A and 4 units of good B. If at one point he is given $5 to spend exclusively on good A, how would this affect his budget constraint? What is Theodore's bliss point if he now consumes 8 units of good A and 5 units of good B as a result?
1
Yam has the following utility function for Apples (X1) and Ice Cream (X2), U(X1,X2) = Min{3X1,X2}. Yam likes to get more of both Apples and Ice Cream. Suppose Yam has an income of M = $160 budgeted to be spend on these two goods and the prices of Apples and Ice Cream are p1 =$2, p2 =$1. Yam's optimal consumption of Apples is and Ice Cream is (Please put your answer in numerical values with no comma or decimal place.) Suppose a quantity tax of $1 is imposed on Ice Cream. Yam's after tax optimal consumption of Apples is and Ice Cream is (Please put your answer in numerical values with no comma or decimal place.) Suppose instead of the quantity tax, the government choose to impose a lump-sum tax of $20. After the imposition of the lump-sum tax, Yam's optimal consumption of Apples is and Ice Cream is (Please put your answer in numerical values with no comma or decimal place.) If government would have to impose one of these 2 kinds of taxes, which of these types of tax would be better…
A consumer currently spends a given budget on two goods, X and Y, in such quantities that the marginal utility of X is 15 and the marginal utility of Y is 8. The unit price of X is $3 and the unit price of Y is $2. The utility-maximizing rule suggests that this consumer should Multiple Choice a. decrease consumption of product X and increase consumption of product Y. b. increase consumption of product X and increase consumption of product Y. c. decrease consumption of product Y and increase consumption of product X. d. stick with the current consumption mix because it yields maximum utility.
illustrate diagrammatically how the optimal choice of a consumer changes as a result of a decrease in the consumer’s income, when one of the two goods on offer is a normal good. To complete this activity you must have a clear understanding of how the optimal choice is determined, what happens to the budget constraint as the consumer’s income decreases, and the concept of a normal good.
Assume that you have a budget of Taka 4000 that can spend on two goods like: coke and burger. Suppose coke costs Taka 100 per unit and burger costs 400 per unit. Suppose also that your utility function is given by the equation U(B, C) = 20BC. Write your budget equation. What combination of coke and burger should you buy to maximize utility?