Hand written solutions are strictly prohibited 2. A utility maximizing consumer with u(x, y) = x¹/2y¹/2 and income m = 16 pays px=4 and py = 4. Next monththe price of good x will fall to px=1 but the price of good y will be unchanged.a. Provide an Indifference Curve and Budget Line Diagram to illustrate and quantify the IncomeEffect and Substitution Effect for this price change as Bundles A, B and C.b. Suppose that the reduction in px required the customer to purchase a membership card. What isthe maximum amount this consumer would pay to purchase this card?

Utility is maximized given the utility function of consumers by purchasing that combination of goods…

a. Provide an Indifference Curve and Budget Line Diagram Effect and Substitution Effect for this price change as Bundles A, B and C. b. Suppose that the reduction in px required the customer to purchase a membership card. What is the maximum amount this consumer would pay to purchase this card?

a. Provide an Indifference Curve and Budget Line Diagram Effect and Substitution Effect for this price change as Bundles A, B and C. b. Suppose that the reduction in px required the customer to purchase a membership card. What is the maximum amount this consumer would pay to purchase this card?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Concept explainers

Form Utility

The term utility in general refers to the satisfaction earned from usage of a particular product or service. Utility always plays an important role because it influences various important elements like demand & thereby the price of the good or service as well. Though utility is not easy to measure, various types of economic models can be used indirectly. There can be various types of utilities like economic utility, marginal utility, cardinal utility, form utility.

Question

Hand written solutions are strictly prohibited

2. A utility maximizing consumer with u(x, y) = x¹/2y¹/2 and income m = 16 pays px=4 and py = 4. Next month
the price of good x will fall to px=1 but the price of good y will be unchanged.
a. Provide an Indifference Curve and Budget Line Diagram to illustrate and quantify the Income
Effect and Substitution Effect for this price change as Bundles A, B and C.
b. Suppose that the reduction in px required the customer to purchase a membership card. What is
the maximum amount this consumer would pay to purchase this card?

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Step 1: Utility maximization

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Step 2: Part a.

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Step 3: Income and substitution effect:

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Step 4: Further calculation:

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Step 5: Part b.

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