Question #1: Jane spends all of her income on two goods: Good "a" and Good “b". Her preferences can be expressed as u(a, b) = In(a) + In(b). Her total income is m, the price of Good "" is p, = $2. Suppose that Jane's 10 3 weekly income is not fixed but rather varies between $10 and $99, that is. 10 < m < 99. Hereby, each student is asked to help Jane and set a specific weekly $ income for her. a) Please calculate the marginal rate of substitution of two goods "a" and “b". b) Please find the optimal amounts of two goods that Jane will choose. c) Assume that the price of good "a" rises from pa = $1 to Pa = $2. i. Please find the change in total demand, ii. discuss whether this good is a normal, inferior, bad, Giffen or ordinary good and iii. explain if good "a" and good "b" complement each other.

ENGR.ECONOMIC ANALYSIS
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Chapter1: Making Economics Decisions
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Question #1:
Jane spends all of her income on two goods: Good "a" and Good “"". Her preferences can be expressed as
u(a, b) = In(a)
2
10
In(b). Her total income is m, the price of Good "b" is pp
= $2. Suppose that Jane's
3
3
weekly income is not fixed but rather varies between $10 and $99, that is. 10 <m < 99. Hereby, each
student is asked to help Jane and set a specific weekly $ income for her.
a) Please calculate the marginal rate of substitution of two goods "a" and "b".
b) Please find the optimal amounts of two goods that Jane will choose.
c) Assume that the price of good "a" rises from pa = $1 to pa = $2. i. Please find the change in total
demand, ii. discuss whether this good is a normal, inferior, bad, Giffen or ordinary good and iii. explain
if good "a" and good "b" complement each other.
d) Please find the substitution effect and income effect and interpret your result.
Transcribed Image Text:Question #1: Jane spends all of her income on two goods: Good "a" and Good “"". Her preferences can be expressed as u(a, b) = In(a) 2 10 In(b). Her total income is m, the price of Good "b" is pp = $2. Suppose that Jane's 3 3 weekly income is not fixed but rather varies between $10 and $99, that is. 10 <m < 99. Hereby, each student is asked to help Jane and set a specific weekly $ income for her. a) Please calculate the marginal rate of substitution of two goods "a" and "b". b) Please find the optimal amounts of two goods that Jane will choose. c) Assume that the price of good "a" rises from pa = $1 to pa = $2. i. Please find the change in total demand, ii. discuss whether this good is a normal, inferior, bad, Giffen or ordinary good and iii. explain if good "a" and good "b" complement each other. d) Please find the substitution effect and income effect and interpret your result.
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