Loise spends £20 on tea (T) and coffee (C). Her preferences for these goods can be described by the following utility function: U(T, C) = 2T +C²-C (MUT=2, MUC = 2C — 1). Suppose that one cup of tea costs £1.60 while one cup of Loise's favourite coffee costs £4.00. a) Find Loise's optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning. b) Discuss how Loise's optimal consumption choice would change when her disposable budget changes. c) If the price of tea increases to £2.00 per cup, how should the price of coffee change so that Loise can be as well off as before this change in prices? d) Discuss the implications of the price change from c) on Loise's optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Loise's demand for tea and/or coffee.

Loise spends £20 on tea (T) and coffee (C). Her preferences for these goods can be described by the following utility function: U(T, C) = 2T +C²-C (MUT=2, MUC = 2C — 1). Suppose that one cup of tea costs £1.60 while one cup of Loise's favourite coffee costs £4.00. a) Find Loise's optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning. b) Discuss how Loise's optimal consumption choice would change when her disposable budget changes. c) If the price of tea increases to £2.00 per cup, how should the price of coffee change so that Loise can be as well off as before this change in prices? d) Discuss the implications of the price change from c) on Loise's optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Loise's demand for tea and/or coffee.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

The price of salad is ps = 10, the price of green juice is pg = 5, and Tom’s income is I = 100.
EXERCISE 5 Loise spends £20 on tea (T) and coffee (C). Her preferences for these goods can be described by the following utility function: ( , ). Suppose that one cup of tea costs £1.60 while one cup of Loise’s favourite coffee costs £4.00. Find Loise’s optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning. Discuss how Loise’s optimal consumption choice would change when her disposable budget changes. If the price of tea increases to £2.00 per cup, how should the price of coffee change so that Loise can be as well off as before this change in prices? Discuss the implications of the price change from c) on Loise’s optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Loise’s demand for tea and/or coffee.
Suppose you had a budget of $20.00 and the prices of a burger and a slice of pizza are $5.00 and $2.00 respectively. What would be your optimal consumption bundle?
Problem 3 (10 points; 5 points for each part): Richard has a total utility function of: TU = 10q₁q₁²+24q2q2² +9192, where q₁ and q2 are goods. Richard is currently consuming at q₁ = 4 and q₂ = 6, which is also his utility maximizing consumption level. (Richard's optimal point is an interior solution). (a) How much additional utility would Richard receive if he were to increase his consumption of q2 from 6 to 7? (5 points). (b) How much q2 is Richard willing to pay (in terms of q2) in order to consume the 5th unit of q₁? (5 points).
Consider the following utility function: U= 100x0.50,0.50 A consumer faces prices of P, = $2 and P, =$1. Assuming that graphically good X is on the horizontal axis and good Y is on the vertical axis, suppose the consumer chooses to consume 6 units of good X and 11 units of good Y. Then the marginal rate of substitution is equal to: MRS = 1.83. (Enter your response rounded to two decimal places. Do not forget to include the negative sign.) Use absolute values. The consumer should consume to maximize utility. more Y and less X the same amount of X and Y more X and less Y O étv MacBook Air 80 esc F1 F2 F3 F4 F5 F6 F7 F8 # $ % & 1 2 7 Q W E T Y tab S D F G caps lock C V M ft control option command つつエ B N
Assume, as in Exercise 22.1, that a consumer has utility function F or fruit and chocolate. Determine the consumer's demand functions q1(P1, P2, M) and q2(P1, P2, M). Determine also It* in terms of P1, P2 and M. Find the indirect utility function and show that It* = 8Vj8M. Suppose, as before, that fruit costs $1 per unit and chocolate $2 per unit. If the income is raised from $36 to $36.5, determine the precise value of the resulting change in the indirect utility function. Show that this is approximately equal to (O.5)λ*, where λ* is evaluated at P1 = 1,P2 = 2 and M = 36. Exercise 22.1 A consumer purchases quantities of two commodities, fruit and chocolate, each month. The consumer's utility function is For a bundle (X1, X2) of X1 units of fruit and X2 units of chocolate. The consumer has a total of $49 to spend on fruit and chocolate each month. Fruit cost $1 per unit and chocolate costs $2 per unit. How many units of each should the consumer buy…