Bob’s preferences for apples (A) and bananas (B) are represented by U(A,B)=A+2B. Apples cost £2 and bananas £1. Given that Bob’s monthly income is £30 answer the following questions: a) What type of goods are apples and bananas for Bob? b) What is the proportion to which Bob is willing to exchange apples for bananas? c) Illustrate and solve graphically Bob’s utility maximisation problem. d) If his income increases every month by £10, how will Bob’s consumption choice be affected? Illustrate graphically the income expansion path and the Engel curve for each good. e) How will an increase in the price of bananas to £6 affect Bob’s optimal consumption choice? (Bob’s income is £30) f) Graph Bob’s demand curve for each good. g) Assume that Bob wins a voucher of £20 redeemable only in apples. How would this affect Bob’s his utility? (Assume that prices and income are as described initially) h) Assume that Bob is presented with two options: an apples voucher of £20 or just £6 to spend in any good he wants. What would Bob choose? Explain your argument.
Bob’s preferences for apples (A) and bananas (B) are represented by U(A,B)=A+2B. Apples cost £2 and bananas £1. Given that Bob’s monthly income is £30 answer the following questions:
a) What type of goods are apples and bananas for Bob?
b) What is the proportion to which Bob is willing to exchange apples for bananas?
c) Illustrate and solve graphically Bob’s utility maximisation problem.
d) If his income increases every month by £10, how will Bob’s consumption choice be affected? Illustrate graphically the income expansion path and the Engel curve for each good.
e) How will an increase in the price of bananas to £6 affect Bob’s optimal consumption choice? (Bob’s income is £30)
f) Graph Bob’s demand curve for each good.
g) Assume that Bob wins a voucher of £20 redeemable only in apples. How would this affect Bob’s his utility? (Assume that prices and income are as described initially)
h) Assume that Bob is presented with two options: an apples voucher of £20 or just £6 to spend in any good he wants. What would Bob choose? Explain your argument.
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