Consider an economy with two goods t = 1, 2. Whenever an individual consumes xị units of good 1 and x2 units of good 2, their utility is given by u(x1, x2) In x1 + 8 In x2, where d is a parameter taking values 0 < 8 < 1. (i) How does the parameter d affect the marginal rate of substitution between goods 1 and 2? Explain intuitively how does the relative preference for goods 1 and 2 change as the parameter d increases.

Consider an economy with two goods t = 1, 2. Whenever an individual consumes xị units of good 1 and x2 units of good 2, their utility is given by u(x1, x2) In x1 + 8 In x2, where d is a parameter taking values 0 < 8 < 1. (i) How does the parameter d affect the marginal rate of substitution between goods 1 and 2? Explain intuitively how does the relative preference for goods 1 and 2 change as the parameter d increases.

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter20: Consumer Choice: Maximizing Utility And Behavioral Economics

Section: Chapter Questions

Problem 6QP

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A consumer has the following utility function: Ulx, y) = xy -y, *21 where x and y represents the quantities consumed of goods X and Y. y 20 What will be the substitution and income effects for X and Yassuming that the consumer attempts to maintain the same level of utility achieved before price of Y increased (that is, when price of Y was $1)? SEx= +0.5 IEx = -0.5 SE, = -0.25 IE- = -0.25 SEx= +0.293 IE = -0.293 SEy = -0.414 IE, = +0.414 SEr= +0.25 IE SE, = -0.75 IE, = -0.75 = -0.25 SEx= +0.414 IEx = -0.414 SEy = -0.293 IE, = -0.207 Income = $3 Px= $1, Py= $2
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