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we consider an agent Ann who consumes goods and y and has a utility U(x,y) = x²y. In these problems, Good r costs P and good y costs Pu.

we consider an agent Ann who consumes goods and y and has a utility U(x,y) = x²y. In these problems, Good r costs P and good y costs Pu.

Micro Economics For Today
Micro Economics For Today
10th Edition
ISBN:9781337613064
Author:Tucker, Irvin B.
Publisher:Tucker, Irvin B.
Chapter6: Consumer Choice Theory
Section: Chapter Questions
Problem 12SQ
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we consider an agent Ann who consumes goods x and y and has a utility U(x, y) = r²y. In these problems, Good r costs P and good y costs Py.
Transcribed Image Text:we consider an agent Ann who consumes goods x and y and has a utility U(x, y) = r²y. In these problems, Good r costs P and good y costs Py.
Imagine that is the quantity of Blood Angel marine models. Ann wants to get into table top war gaming, and build a Blood Angels army. However, the models are too expensive. Fortunately, Ann's father is a table top war gaming enthusiast, and offers to pay half the price. Prior to any support from her father, P₂ = 4 and Py = 2 (as in Prob. 2.) Ann's has I = 60 to spend. (So long as you indicate it's use, you may use your answers from problems (1) and (2) in your answers below.) (a) What is Ann's consumption of x and y at the prices P = 4 and Py = 2? (b) What is Ann's consumption of r and y when her father lowers her effective price for a to P₂ = 2? (c) How much does this price subsidy cost her father? (d) How much would it cost Ann's father to raise her utility to the same level by instead leaving prices the same and simply giving Ann some money? (e) You should have found that your answer to (d) was less than your answer to (c). Draw a picture which indicates: Ann's initial consumption, Ann's consumption following a price subsidy, and Ann's consumption after a monetary transfer. Use this picture to explain why your answer to (d) is lower.
Transcribed Image Text:Imagine that is the quantity of Blood Angel marine models. Ann wants to get into table top war gaming, and build a Blood Angels army. However, the models are too expensive. Fortunately, Ann's father is a table top war gaming enthusiast, and offers to pay half the price. Prior to any support from her father, P₂ = 4 and Py = 2 (as in Prob. 2.) Ann's has I = 60 to spend. (So long as you indicate it's use, you may use your answers from problems (1) and (2) in your answers below.) (a) What is Ann's consumption of x and y at the prices P = 4 and Py = 2? (b) What is Ann's consumption of r and y when her father lowers her effective price for a to P₂ = 2? (c) How much does this price subsidy cost her father? (d) How much would it cost Ann's father to raise her utility to the same level by instead leaving prices the same and simply giving Ann some money? (e) You should have found that your answer to (d) was less than your answer to (c). Draw a picture which indicates: Ann's initial consumption, Ann's consumption following a price subsidy, and Ann's consumption after a monetary transfer. Use this picture to explain why your answer to (d) is lower.
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