(a) (b) What is the slope of Douglas' indifference curve at the point (x₁, x2)? If Douglas' budget line is tangent to his indifference curve at (x₁, x2) what is the ratio equal to? (c) P2x2 When he is consuming the best bundle he can afford, what fraction of his income does Douglas spend on ₁? 3x1 P2 Solution: a) His MRS is – 32. b) At the optimal bundle we have, -MRS = P1. Therefore, we have 11 = 2/3. c) Solving for Douglas' demand for each good 3m 1. Therefore, P2I2 2m 1 and ₂: = = 2+3 pi 2+3 p2 in terms of income and prices, we have t he spends 2/5th's of his income on good 1 and 3/5th's on good 2.

(a) (b) What is the slope of Douglas' indifference curve at the point (x₁, x2)? If Douglas' budget line is tangent to his indifference curve at (x₁, x2) what is the ratio equal to? (c) P2x2 When he is consuming the best bundle he can afford, what fraction of his income does Douglas spend on ₁? 3x1 P2 Solution: a) His MRS is – 32. b) At the optimal bundle we have, -MRS = P1. Therefore, we have 11 = 2/3. c) Solving for Douglas' demand for each good 3m 1. Therefore, P2I2 2m 1 and ₂: = = 2+3 pi 2+3 p2 in terms of income and prices, we have t he spends 2/5th's of his income on good 1 and 3/5th's on good 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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