Consider a utility function: U (F,C) = FC so MU_F = C and MU_C = F. Suppose as Case A, Total income is $120 and per unit prices of Food (F) and Cloth (C) are $2 and $10, respectively. a. What is the value of MRS at the optimal point and what does this value mean? b. What is the optimal consumption bundle i.e (F*,C*)? c. Plot the budget line and clearly depict the point of optimality in the F (x-axis)-C (y-axis) space. d. Now suppose Case B, where assuming if income decreases to $100, holding all else the same, do the same analysis (parts a-c) and contrast your answers to Case A. For part c, you should draw old (Case A) and new (Case B) budget lines/point of optimality.
Q5. Consider a utility function: U (F,C) = FC so MU_F = C and MU_C = F.
Suppose as Case A, Total income is $120 and per unit prices of Food (F) and Cloth (C) are $2 and $10, respectively.
a. What is the value of MRS at the optimal point and what does this value mean?
b. What is the optimal consumption bundle i.e (F*,C*)?
c. Plot the budget line and clearly depict the point of optimality in the F (x-axis)-C (y-axis) space.
d. Now suppose Case B, where assuming if income decreases to $100, holding all else the same, do the same analysis (parts a-c) and contrast your answers to Case A. For part c, you should draw old (Case A) and new (Case B) budget lines/point of optimality.
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