Problem 5. Consider the utility function U = In(M) + In(S) where M is the level of medical care, and S is spending on all other goods. This implies MgUM = M1 and MgUS = S1. Suppose medical care is priced at $120 per unit of medical care, income is $30,000, and let Ps = 1.1. Write the budget constraint. [5]2. Sketch the budget constraint where the quantity of M is on the horizontal axis. [5]3. Sketch the optimality condition. How is this optimal computed? [5]4. Suppose price of medical care decreases by $20 per unit of medical care, sketch the new budget constraint on the same graph as Problem 5.2. [5]
Problem 5. Consider the utility function U = In(M) + In(S) where M is the level of medical care, and S is spending on all other goods. This implies MgUM = M1 and MgUS = S1. Suppose medical care is priced at $120 per unit of medical care, income is $30,000, and let Ps = 1.1. Write the budget constraint. [5]2. Sketch the budget constraint where the quantity of M is on the horizontal axis. [5]3. Sketch the optimality condition. How is this optimal computed? [5]4. Suppose price of medical care decreases by $20 per unit of medical care, sketch the new budget constraint on the same graph as Problem 5.2. [5]
Economics (MindTap Course List)
13th Edition
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Roger A. Arnold
ChapterE: Budget Constraint And Indifference Curve Analysis
Section: Chapter Questions
Problem 3QP
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![Problem 5. Consider the utility function U = In(M) + In(S) where M is the level of medical
care, and S is spending on all other goods. This implies MgUM = M1 and MgUS = S1.
Suppose medical care is priced at $120 per unit of medical care, income is $30,000, and let Ps
= 1.1. Write the budget constraint. [5]2. Sketch the budget constraint where the quantity of
M is on the horizontal axis. [5]3. Sketch the optimality condition. How is this optimal
computed? [5]4. Suppose price of medical care decreases by $20 per unit of medical care,
sketch the new budget constraint on the same graph as Problem 5.2. [5]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F7a73a0c8-b8b6-497c-a1cb-0d5384595a2d%2F09372220-59b3-4076-b8f7-5e6d1f7ee825%2Fp4z1ti5_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Problem 5. Consider the utility function U = In(M) + In(S) where M is the level of medical
care, and S is spending on all other goods. This implies MgUM = M1 and MgUS = S1.
Suppose medical care is priced at $120 per unit of medical care, income is $30,000, and let Ps
= 1.1. Write the budget constraint. [5]2. Sketch the budget constraint where the quantity of
M is on the horizontal axis. [5]3. Sketch the optimality condition. How is this optimal
computed? [5]4. Suppose price of medical care decreases by $20 per unit of medical care,
sketch the new budget constraint on the same graph as Problem 5.2. [5]
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