Question 1 Consider an economy with two goods t = 1,2. Whenever an individual consumes ₁ units of good 1 and ₂ units of good 2, their utility is given by u(x₁, x2) = aln x₁ + ln x2, where a > 0 is a free parameter. (i) How does the parameter a 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 a increases.

Question 1 Consider an economy with two goods t = 1,2. Whenever an individual consumes ₁ units of good 1 and ₂ units of good 2, their utility is given by u(x₁, x2) = aln x₁ + ln x2, where a > 0 is a free parameter. (i) How does the parameter a 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 a increases.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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2)Ben is choosing between cookies and soda. Denote the marginal utility of cookies is MUc, and the marginal utility of soda is MUs. Which of the following relationship is true regarding the marginal utility of substitution (MŘS) of cookie in terms of soda? A) MRS= MUc B) MRS = MUS C) MRS = MUS / MUC D) MRS = MUc / MUs
2. Sally consumes two goods, X and Y. Her utility function is given by the expression U = 3XY². The current market price for X is £10, while the market price for Y is £5. Sally's current in come is £500. (a) Sketch a set of two indifference curves for Sally in her consumption of X and Y. (b) Write the expression for Sally's budget constraint. Graph the budget constraint and determine its slope. (c) Determine the X,Y combination which maximises Sally's utility, given her budget constraint. (d) Calculate the impact on Sally's optimum market basket of an increase in the price of X to $15. What will happen to her utility as a result of the price increase?
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Question 1 1.1 Explain the principle of a diminishing marginal rate of substitution within the context of consumer preferences and explain the relationship between this principle and the axiom of strictly convex preferences. 1.2 Explain the difference between the ordinal and cardinal approach to utility. Also explain why the ordinal approach will always allow for multiple real-valued utility functions rep- resenting the same underlying (strictly monotonic) preference relations (in other words, explain why using the ordinal approach leads to non-unique utility functions).
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