Answered: Penelope utility function is U (a, b) =…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Related questions

Question

Penelope utility function is U (a, b) = a+ 10b−b2, where a is the amount of apples
consumed and b is the amount of bananas consumed. He has $100 income. The
price of apple is $0.5 per lb. Price of banana’s though increases with its purchase.
Specifically, buying, b pounds of bananas will cost Pedro b2.
a. What is Penelope optimal consumption?
b. Now, he suddenly acquires an extra $100 income. How this will change
his allocation?

Expert Solution

Step 1

Utility function : U (a, b) = a+ 10b−b²

Income = 100

b pounds on banana cost = b²

1 pound of banana would cost = b²/b

=> b

Therefore , Price of banana = b

Budget Constraint : Pa *a + Pb *b = Income

=> 0.5 a + b² = 100

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions