The initial budget constraint (BC₁) shows the two friends' budget constraint when the price of an upscale dinner is $100. At this price, Rajiv andSimone would choose to consume five upscale dinners.Suppose that the price of an upscale dinner decreases to $50, shifting their budget constraint to BC2, which represents a new relative price of fivediner brunches per upscale dinner. (Hint: The blue line labeled H is parallel to BC₂ and tangent to I₁ at point M.)To maintain the level of happiness they experienced before the price decrease-that is, to consume at a point along the same indifference curve asthey were on initially (₁)-the income spent on upscale dinners and brunch at diners would now only have to be $However, in reality, ratherthan maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they areoff than before the price change in upscale dinners.On the following table, indicate which point movement represents the substitution effect and income effect for upscale dinners when the pricedecreases from $100 to $50. Then indicate the consumption change that results from each effect.Upscale DinnersSubstitution EffectIncome EffectConsumption ChangeRepresented By... (Quantity of upscale dinners)In this case, the price decrease of upscale dinners causes the real income of the two friends toSimone's real income and the direction of the income effect, upscale dinners areBecause of the change to Rajiv andfor the friends. 9. Income and substitution effectsRajiv and Simone are two friends living in Denver who love to try different restaurants in their city, but have specific preferences regarding venues forcertain meals. In particular, they like to eat out at upscale gastropubs for dinner and diners for brunch. On the following diagram, the purple curves1₁ and 12 represent two of their indifference curves for upscale dinners and diner brunches. Assume that the friends have a monthly budget of $1,000available to spend on going out to eat, and further, that the price of diner brunch always $10. Each labeled point represents tangency between abudget constraint and the corresponding indifference curve.DINER BRUNCHES005 6N|MBC,UPSCALE DINNERSHBC₂(?

The income effect is the change in purchasing power that occurs as a result of a change in the price…

To maintain the level of happiness they experienced before the price decrease-that is, to consume at a point along the same indifference curve as they were on initially (₁)-the income spent on upscale dinners and brunch at diners would now only have to be $ However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in upscale dinners.

To maintain the level of happiness they experienced before the price decrease-that is, to consume at a point along the same indifference curve as they were on initially (₁)-the income spent on upscale dinners and brunch at diners would now only have to be $ However, in reality, rather than maintaining their original level of utility, the friends choose the optimal bundle along their new budget constraint. At this point, they are off than before the price change in upscale dinners.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. What is the relationship between pS/pC and pC /pB? What feature of the utility function is responsible for these ratios?2. Now suppose that the moment before the above prices are elicited, the subject gets $10, which does not become part of her reference point. Again calculate the three prices pS, pB, and pC. What is the relationship between pS/pC and pC /pB? Why? 3. In some actual experiments, subjects were not given money, and pS/PC was found to be about 2, and PC/pB was found to be about 1. Write down a utility function that can produce these ratios.
Which of the following utility functions represents preferences over consumption bundles (X, Y) that violate the assumption of diminishing MRS? (a) U(X,Y) = 3 ln(X) + 5 ln(Y) (b) U(X,Y) = X² + y² (c) U(X, Y) = XY (d) U(X,Y) = X² + Y² (e) U(X, Y) = X¹Y³
Q5. Jason has preferences defined over novels (good x) and DVDs (good y) described by the utility function U(x,y)= x2y2. He has an income of $120; novels cost $5 each, while DVDs are priced at $15 each. [Hint: MUx=2xy2, MUy=2x2y] a) Sketch Jason's budget constraint, indifference curves and the interior solution in a graph. b) Calculate Jason's optimal consumption bundle, and his maximized utility level. Suppose the price of novels increases to $7.5, while the price of DVDs and income are unchanged. c) Calculate his new optimal bundle, show it in the same graph from a), and interpret the Marginal Rate of Substitution (MRS) at this new optional bundle (point).
Liwei consumes X₁ and x2 together in fixed proportions. She always consumes 2 units of X₁ for 1 unit x₂. One utility function that describes her preferences is: u(x1, x2) = 2x1 + x2. u(x1, x2) = min{2x1, x₂}. O u(x₁, x₂) = min{x₁/2, x₂}. u(x1, x2) = 2x1 + 4x2. O u(x1, x2) = 2x1x2.
True, false, or undetermined?
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I. A)MRS=1/3, B)MRS=1/4, C)MRS=4/3, D)MRS=12 II. A)Rhea should buy more bread, less milk, B)Rhea should buy more milk, less bread, C) Rhea maximizes her utility at bundle A, so she should not change her consumptions of either good, D) Rhea cannot afford bundle A, so she should buy less of both goods III. A)Rhea's MRS at bundle A is greater than the price ratio (Pb/Pm), B)Changing her bundle moves Rhea to a higher indifference curve, C)The slope of the indifference curve (where bundle A is found) is not equal to the slope of Rhea's budget constraint, D)All of the above statements explain your answer to part II.
John’s preferences for apples (A) and berries (B) are represented by U(A,B)= A+2B . Apples cost £2 and berries £1. Given that John’s monthly income is £30 answer the following questions: What type of goods are apples and berries for John? What is the proportion to which John is willing to exchange apples for berries? Illustrate and solve graphically John’s utility maximization problem. If his income increases every month by £10, how will John’s consumption choice be affected? Illustrate graphically the income expansion path and the Engel curve for each good. How will an increase in the price of berries to £6 affect John’s optimal consumption choice? (John’s income is £30) Graph John’s demand curve for each good. Assume that John wins a voucher of £20, redeemable only in apples. How would this affect John’s utility? (Assume that prices and income are as described initially) Assume that John is presented with two options: an apple voucher of £20 or just £6 to spend on any good he wants.…
34) Suppose that left shoes and right shoes must be purchased separately. Ingrid needs an equal number of each type of shoe and has a budget of $100 for shoes. Left shoes always cost $1. If right shoes cost $19 each, how many of each will Ingrid buy? If the price of right shoes increases to $49 each, how will Ingrid react? Explain your answer by drawing the indifference curves-budget lines. 35) Johnny has $100 to spend on books and all other goods. Books cost $20 each and Johnny is at equilibrium consuming 3 books and $40 worth of other goods. Johnny's grandmom wants to give Johnny either a book or $20 for his birthday. Which gift does Johnny prefer? Explain using an indifference map and budget lines.