To remain in consumer optimum, a price decrease requiresV in consumption. A price increase requiresin consumption.Each change in price has a substitution effect. When the price of a goodthe consumerV in favor of that relatively cheaper good.Each change in price also has a real-income effect. When priceV, the consumer's real purchasing power increases, causing the consumer to purchaseV of most goods. Assuming that the principle of diminishingmarginal utility holds, the demand curve must slope downward.The price of water is lower than the price of diamonds because people consumeV water than diamonds, which results in amarginal utility of water compared with the marginal utility of diamonds.

To remain in consumer optimum, a price decrease requires an increase in consumption. A price…

Answered: To remain in consumer optimum, a price…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Rick consumes 2 goods, Chicken McNuggets (M) with Szechuan sauce (S). His utility function is U(M, S) = M2/3S1/3 and his income is m. The price of Chicken McNuggets is p, and the price of Szechuan sauce is 1. d. Use the equation from part (c) and the budget constraint from part (a) to find Rick’s demand for each of the two goods. e. Suppose m=100 and p=1. How much of each good does Rick consume? Draw a graph showing Rick’s budget constraint and indifference curve passing through his chosen consumption bundle. f. Suppose m=100 and p=2. How much of each good does Rick consume? On the same graph from part (e), show Rick’s budget constraint and indifference curve passing through his new chosen consumption bundle.
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Suppose that, by law, a person is required to consume a fixed amount of good X, say X0. Assuming X is a normal good, explain how this law reduces utility for both high and low income people.
Amy consumes x and y and her preferences can be represented by the following utility function U(x,y) = 4x + y. 1. Are Amy's preferences transitive? 2. Does the marginal utility of x diminish, remain constant, or increase as the consumer buys more x? Explain. 6- 3. Can you use (2) to answer whether Amy's preferences are strictly monotonic? 4. What is MRS.y ? Is MRSx.y diminishing, constant, or increasing as the consumer substitutes x for y along an indifference curve? 5. On a graph with x on the horizontal axis and y on the vertical axis, draw a typical indifference curve. Also indicate on your graph whether the indifference curve will intersect either or both axes. Label the curve U1. 6. Are Amy's preferences convex? Are they strictly convex? Explain
The marginal utility for shoes and coffee is given below for five individuals. A pair of shoes costs $2, and a cup of coffee costs $1. Which of these consumers are optimizing over their choices? Explain For those who are not, how should they adjust their spending? Explain “Pasta is Miguel’s favorite meal therefore the law of diminishing marginal utility does not apply”. Do you agree with this statement? It is known that the indifference curve is convex. What does this tell you about the relationship between the goods? The income effect and the substitution effect work in the same direction for a normal good. Explain how this differs for an inferior good.
Suppose Jeff has a perfect substitute preferences for watching movies (M) and TV (T) shows. Jeff's MRSTM is such that he is always indifferent between watching one movie and five TV shows independent of the amount of goods consumed. Which of the following statements is true? If Jeff had a choice between 1 movie and 1 TV show before bed, he would choose to watch the movie. If Jeff has already watched 3 movies and no TV shows, then he would prefer to watch a TV show next. He is indifferent between watching 1 TV show or 1 movie before bed. Jeff would prefer watching 2 TV shows and no movies over watching 2 Movies and no TV shows.
When plotted Sarah's indifference curve for coffee and tea reveals parallel indifference curves that always have a slope of -1. Suppose that Sarah's budget constraint is 20 -1.5C+1.0T where C is the quantity of coffee and T is tea. If Sarah wants to maximize utility, she will buy: a) equal amount of coffee and tea b) coffee only c) tea only d) more coffee than tea e) a combination of coffee and tea cannot be determined from the information given
Bob views apples and oranges as perfect substitutes in his consumption, and MRS = 1 for all combinations of the two goods in his indifference map. Suppose the price of apples is €2 per pound, the price of oranges is €3 per pound, and Bob's budget is $24 per week. What is Bob's utility maximizing choice between these two goods? A. 12 pounds of apples and no oranges B. 8 pounds of oranges and no apples C. 4 pounds of oranges and 6 pounds of apples D. 12 pounds of oranges and no apples Fiona uses her entire budget to purchase food and clothing. The price of food is €1 per unit and the price of clothing is €2 per unit. Fiona's marginal utility from food is 2 and her marginal utility from clothing is 6. She currently spends all her money on food and clothing. Her objective is to maximise her utility. Which of the following statements is correct? Fiona should buy more food and more clothing. A. B. C. D. E. Fiona is currently maximsing her utility and should continue to consume her current…
A consumer currently spends a given budget on two goods, X and Y, in such quantities that the marginal utility of X is 15 and the marginal utility of Y is 8. The unit price of X is $3 and the unit price of Y is $2. The utility-maximizing rule suggests that this consumer should Multiple Choice a. decrease consumption of product X and increase consumption of product Y. b. increase consumption of product X and increase consumption of product Y. c. decrease consumption of product Y and increase consumption of product X. d. stick with the current consumption mix because it yields maximum utility.

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