Consider a consumer with preferences over two goods, r₁ and 22, that can be represented by the following utility function: u(11,12)=15195 0.5 0.5 The consumer has an exogenous income (M) of $16. Initially the price of r, is $2 while the price of r2 is $0.50. 1. Find the consumer's optimal consumption bundle and associated utility level. Alas, the world changes and the price of r, decreases to $1 while the price of r, increases to $4. 2. Find the consumer's new optimal consumption bundle and associated utility level. 3. Define and calculate either the CV or the EV of the change (Make sure to clearly state whether you are defining/calculating EV or CV).

Consider a consumer with preferences over two goods, r₁ and 22, that can be represented by the following utility function: u(11,12)=15195 0.5 0.5 The consumer has an exogenous income (M) of $16. Initially the price of r, is $2 while the price of r2 is $0.50. 1. Find the consumer's optimal consumption bundle and associated utility level. Alas, the world changes and the price of r, decreases to $1 while the price of r, increases to $4. 2. Find the consumer's new optimal consumption bundle and associated utility level. 3. Define and calculate either the CV or the EV of the change (Make sure to clearly state whether you are defining/calculating EV or CV).

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

Comparative Advantage and Absolute Advantage Analysis

The theory of absolute advantage was given by Adam Smith in the year 1776.

Question

Consider a consumer with preferences over two goods, r₁ and 22, that can be represented
by the following utility function:
u(11,1₂)=x2.5
The consumer has an exogenous income (M) of $16. Initially the price of r, is $2 while the
price of r2 is $0.50.
1. Find the consumer's optimal consumption bundle and associated utility level.
Alas, the world changes and the price of r, decreases to $1 while the price of r, increases to
$4.
2. Find the consumer's new optimal consumption bundle and associated utility level.
3. Define and calculate either the CV or the EV of the change [Make sure to clearly
state whether you are defining/calculating EV or CV).

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