Lucas has $40 per week that he can spend on lemon soda (X) and chips (Y). The price of the lemon soda (PX) is $2 per bottle, and the price of the chips (PY) is $4 price Write down Lucas’s budget constraint. Draw the budget constraint on the graph below. Make sure to indicate the intercepts and the slope of budget constraint. Label it as BC1. Provide an economic interpretation of the slope of the budget constraint BC1 Suppose Lucas’s income decreases to $12 per week, and the price of lemon soda and chips remain the same. Write down Lucas’s new budget constraint. Then draw his new budget constraint on the same graph above. Make sure to indicate the intercepts and the slope. Label it as BC2. Suppose Lucas’s income remains to be $40 per week and the price of chips remains the same, but the price of lemon soda (PX) increases to $5. Write down Lucas’s new budget constraint. Then draw his new budget constraint on the same graph above. Make sure to indicate the intercepts and the slope. Label it as BC3. Lucas likes lemon soda (X) and chips (Y).His utility function is given by: U (X, Y) = X0.2Y0.8 He earns $40 per week to spend on lemon soda (X) and chips (Y).The prices of lemon soda and chips are $2 and $4 respectively.Find out Lucas’s utility-maximizing bundle of lemon soda and chips (X*, Y*). Set up the utility-maximization problem and find out the price ratio of these two goods. Find out Lucas’s marginal utility of lemon soda (MUX) and marginal utility of chips (MUY). Calculate the MRSXY . Set up the optimal tangency condition and solve for Y in terms of X. Solve for Lucas’s optimal consumption bundle of lemon soda (X*) and chips (Y*). Draw the optimal consumption bundle on the budget constraint BC1 in Q1. Denote it as Bundle A. Make sure to indicate the optimal consumption of lemon soda (X*) and chips (Y*). Draw an indifference curve that is tangent to the budget constraint at Bundle A. Calculate the value of the MRSXY (the value not the formula) at the optimal consumption bundle and provide an economic interpretation.

Part A: The budget constraint of Individual L is given below: QX×PX+QY×PY=Y 2QX+4QY=40 Part B:…

Answered: Lucas has $40 per week that he can…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Lucas has $40 per week that he can spend on lemon soda (X) and chips (Y). The price of the lemon soda (P_X) is $2 per bottle, and the price of the chips (P_Y) is $4 price

Write down Lucas’s budget constraint. Draw the budget constraint on the graph below. Make sure to indicate the intercepts and the slope of budget constraint. Label it as BC₁.
Provide an economic interpretation of the slope of the budget constraint BC₁
Suppose Lucas’s income decreases to $12 per week, and the price of lemon soda and chips remain the same. Write down Lucas’s new budget constraint. Then draw his new budget constraint on the same graph above. Make sure to indicate the intercepts and the slope. Label it as BC₂.
Suppose Lucas’s income remains to be $40 per week and the price of chips remains the same, but the price of lemon soda (P_X) increases to $5. Write down Lucas’s new budget constraint. Then draw his new budget constraint on the same graph above. Make sure to indicate the intercepts and the slope. Label it as BC₃.

Lucas likes lemon soda (X) and chips (Y).

His utility function is given by: U (X, Y) = X^0.2Y^0.8
He earns $40 per week to spend on lemon soda (X) and chips (Y).
The prices of lemon soda and chips are $2 and $4 respectively.

Find out Lucas’s utility-maximizing bundle of lemon soda and chips (X*, Y*).

Set up the utility-maximization problem and find out the price ratio of these two goods.
Find out Lucas’s marginal utility of lemon soda (MU_X) and marginal utility of chips (MU_Y). Calculate the MRS_XY .
Set up the optimal tangency condition and solve for Y in terms of X.
Solve for Lucas’s optimal consumption bundle of lemon soda (X*) and chips (Y*).
Draw the optimal consumption bundle on the budget constraint BC₁ in Q1. Denote it as Bundle A. Make sure to indicate the optimal consumption of lemon soda (X*) and chips (Y*). Draw an indifference curve that is tangent to the budget constraint at Bundle A.
Calculate the value of the MRS_XY(the value not the formula) at the optimal consumption bundle and provide an economic interpretation.

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