5.6. Bunde's preferences are given by the utility function u(x1, x2) = x1 +X2. For each of the following cases, decompose the price effects into thesubstitution and income effects using either the Hicks-Allen or Slutskydecompositions.-(a) Suppose m = 120, p₁ = 12, and p2P15, keeping p2 and m fixed.(b) Suppose m = 100, P1=20. The price p₁ then falls to= 20, and p2 = 10. The price p₁ then falls to5, keeping p2 and m fixed.

u = x1 + x2 Budget line : m = p1x1 + p2x2 A linear Utility function means that x1 and x2 are…

Answered: 5.6. Bunde's preferences are given by…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider an individual with preferences represented by the following utility function: U (x1, 12) = x{x; The individual faces prices: P1 = 0.5; p2 = 1 And has income: M = 250 If the price of good one increases to p1 =1 For this change in price, mark all of the following answers that are correct. (EV = equivalent variation; CV = compensating variation) O In absolute value, EV is greater than Cv O In absolute values, change in Consumer surplus is smaller than CV. O In absolute value, CV is greater than EV In absolute values, change in Consumer Surplus is smaller than EV. There is not enough information to determine an answer.
- Assume an individual has quasilinear preferences of the form U(x1,x2) = 3x1¹2 + 2x2. If the price of Good 1 is $1 and the price of Good 2 is $2, how many additional units will the individual consume of Good 2 if her income increases by $1, assuming we're at an interior optimum? A. B. C. D. The individual's consumption of Good 2 will increase by 1/2 unit. The individual's consumption of Good 2 will increase by 1 unit. The individual's consumption of Good 2 will decrease. The individual's consumption of Good 2 will not change.
Please tell me which of the multiple choices in question 1.6)1.7)1.8) are correct.State only the correct ones please. 1.6) The marginal rate of substitution (MRS) can be defined as: Select one or more: a. The amount of one good that the consumer is willing to trade for one unit of the other. b. The ratio of the amounts of two goods. c. The change in the consumer’s utility when one good is substituted for another. d. The absolute value of the slope of the indifference curve. 1.7) (SEE ATTACHED PICTURE) The diagram shows that: Select one or more: a. If Angela works 24 hours a day she can still survive. b. There is a technically feasible allocation where Angela does not work. c. A new technology that produced more grain would give a larger technically feasible set. d. If Angela needed less grain to survive the technically feasible set would be smaller.
Consider a consumer with M = $120 to spend (income) and faces prices PX = $15 and PY =$5 for goods X and Y. Her utility function is U(X, Y) = X1/2 + Y1/2.a Carefully. express the consumer’s choice problem, using the given information (this is whereyou write out the max operator, the choice variables, the objective function, and the budget constraint). b. Compute the absolute value of the consumer’s marginal rate of substitution, and inspect it todetermine the shape of the consumer’s indifference curves: C-shaped, linear, )-shaped, or some other shape.To show your work, neatly use the arrow argument, increasing X (↑) and decreasing Y (↓) to see whether|MRS(X, Y)| is diminishing along an indifference curve. c. If the indifference curves are C-shaped write out the budget line and the equal slopes conditionthat characterize an interior solution to the consumer’s choice problem. Use the particulars for the givenconsumer. Solve these conditions to find the interior solution. On the other…
12 There are two goods and John's preferences can be represented by u: R²0 R given by u(x) = x₁³x2³. His income and price of the two goods are given by (M, P1, 20 P2) = (12, 1, 2). Which 2 of the following 8 options are false: In John's optimal bundle, he consumes the same amount of good 1 as good 2. If we change John's utility function to u(x) = x + then John's optimal bundle remains unchanged. At John's optimal bundle, the slope of the budget constraint equals the slope of the indifference curve. In John's optimal bundle, he spends the same amount on good 1 as good 2. John's preferences satisfy local non-satiation. At John's optimal bundle, his bang per buck of good 1 equals his bang per buck of good If we change John's utility function to u(x) = In (17 +x₁x₂) then John's optimal bundle remains unchanged. If we change the budget set to (M, P1, P2) = (24, 2, 4) then John's optimal bundle remains unchanged.
A consumer has a (direct) utility function over x1 and x2: u(x₁, x2) = x₁x2.5 The price of good 1 is p1=1; the price of good 2 is p2=2; and the consumer has m=24 in income. Indicate which of the following statements is true. Select one: O Demand for good 1 is equal to 24. O Demand for good 2 is equal to 6. O Indirect utility function is equal to 32. O The consumer will demand 0 units of good 2. O None of the statements is correct.

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