The figure below displays 6 different bundles of Good #1 and Good #2. Bundles A, B, C, D, and E are all on the same indifference curve (displayed in the figure) for an individual. This individual also prefers Bundles A, B, C, D, and E to Bundle F. The table displays the quantities of good #1 and good #2 and the MRS at each bundle. 92, m 91 Bundle A B C D E F Quantity of Good 1 4 7 10 15 22 5 Quantity of Good 2 22 15 10 7 4 5 MRS -3 -2 -1 -1/2 -1/3 -3 Suppose the individual has $20 (y = 20) to spend on a bundle of Good #1 and Good #2. When the prices of Goods #1 and #2 are both $1 (P₁ = P₂ = 1), the individual maximizes their utility by consuming Bundle C (q1 = 10, 92 = 10). If the price of good #1 increased to $3 (p₁ = 3), but both y and p₂ remained the same, the individual will maximize their utility by consuming Bundle F (q1 = 5,9₂ = 5). B) Given the information provided, which statement below is true: A. Good #1 is a normal good. B. Good #1 is an inferior good. C. Goods #1 and #2 are substitutes. D. There is not enough information to say whether one of the above statements is true. A) When faced with the new prices of p₁ = 3 and p₂ = 1, how much income would the individual need to have in order to be just as happy (i.e. receive the same utils) as they were when they had $20 of income (y = 20) and both goods cost $1 (p₁ = P₂ = 1)?
The figure below displays 6 different bundles of Good #1 and Good #2. Bundles A, B, C, D, and E are all on the same indifference curve (displayed in the figure) for an individual. This individual also prefers Bundles A, B, C, D, and E to Bundle F. The table displays the quantities of good #1 and good #2 and the MRS at each bundle. 92, m 91 Bundle A B C D E F Quantity of Good 1 4 7 10 15 22 5 Quantity of Good 2 22 15 10 7 4 5 MRS -3 -2 -1 -1/2 -1/3 -3 Suppose the individual has $20 (y = 20) to spend on a bundle of Good #1 and Good #2. When the prices of Goods #1 and #2 are both $1 (P₁ = P₂ = 1), the individual maximizes their utility by consuming Bundle C (q1 = 10, 92 = 10). If the price of good #1 increased to $3 (p₁ = 3), but both y and p₂ remained the same, the individual will maximize their utility by consuming Bundle F (q1 = 5,9₂ = 5). B) Given the information provided, which statement below is true: A. Good #1 is a normal good. B. Good #1 is an inferior good. C. Goods #1 and #2 are substitutes. D. There is not enough information to say whether one of the above statements is true. A) When faced with the new prices of p₁ = 3 and p₂ = 1, how much income would the individual need to have in order to be just as happy (i.e. receive the same utils) as they were when they had $20 of income (y = 20) and both goods cost $1 (p₁ = P₂ = 1)?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:**Title:** Analyzing Consumer Choice and Utility Maximization
**Introduction:**
The graph provided illustrates six different combinations (bundles) of Good #1 and Good #2 that yield the same level of satisfaction (are on the same indifference curve) for a consumer. The indifference curve represents various combinations of these goods that provide equal utility. The bundles labeled A, B, C, D, and E are preferable to Bundle F, indicating a higher utility. The accompanying table contains the quantities of each good in these bundles and the Marginal Rate of Substitution (MRS).
**Graph Explanation:**
The graph signifies an indifference curve on which Bundles A, B, C, D, and E lie. Each point (each bundle) on this curve shows a combination of Good #1 (quantity \( q_1 \)) and Good #2 (quantity \( q_2 \)) where the consumer derives the same level of satisfaction.
- **Axes:**
- The horizontal axis (\( q_1 \)) represents the quantity of Good #1.
- The vertical axis (\( q_2 \)) represents the quantity of Good #2.
- **Curve Details:**
- The curve slopes downward, indicating a trade-off between Good #1 and Good #2 to maintain the same level of utility.
- Bundle F is isolated and more to the left (lower on both utilities), suggesting less preferred options compared to A through E.
**Table Explanation:**
The table provides detailed quantities for each bundle and their MRS.
| Bundle | Quantity of Good 1 | Quantity of Good 2 | MRS |
|--------|---------------------|---------------------|------|
| A | 4 | 22 | -3 |
| B | 7 | 15 | -2 |
| C | 10 | 10 | -1 |
| D | 15 | 7 | -1/2 |
| E | 22 | 4 | -1/3 |
| F | 5 | 5 | -3 |
**Scenario Analysis:**
- The consumer originally has $20 to allocate between the goods, with both priced at $1. The optimal choice is Bundle C (\( q_1 = 10 \), \( q_2 = 10 \)).
- If the price of Good
Expert Solution
Step 1
We have initial prices p1=p2=1 and the consumer income =y=$20 and then price of good-1 increased to $3.
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