When the prices of goods x and y were €2 per unit of either good, a consumer spent all his monetary income to buy 20 units of x and 60 units of y. When the price of y increased to €4 per unit, the substitution effect would lead her to choose 60 units of x and 30 units of y. Should this person be paid a €80 compensation, she would feel as good as before the price change. True or false, explain.

When the prices of goods x and y were €2 per unit of either good, a consumer spent all his monetary income to buy 20 units of x and 60 units of y. When the price of y increased to €4 per unit, the substitution effect would lead her to choose 60 units of x and 30 units of y. Should this person be paid a €80 compensation, she would feel as good as before the price change. True or false, explain.

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter20: Consumer Choice: Maximizing Utility And Behavioral Economics

Section20.2: Consumer Equilibrium And Demand

Problem 1ST

See similar textbooks

Similar questions

Recent research confirms that the demand for cigarettes is not only inelastic, but it also indicates that smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes. How can the income and substitution effects of a price change help explain this finding?
Refer to the information provided in table below. MU/P for Number of Cinema Tickets Total Utility Marginal Utility Price of a Cinema Ticket Cinema Tickets 140 240 330 400 4 5 440 470 MU/P for Number of Concert Tickets Total Utility Marginal Utility Price of a Concert Ticket Concert Tickets 240 440 600 720 800 850 If the price of a cinema ticket is 20 TL, the price of a concert ticket is 40 TL and the income is 120 TL, draw the budget line. а. b. Find marginal utility for each consumption level for both products and show your work in Table. Find the utility maximizing level of consumption bundle if the income of the consumer is 120 TL. Show the utility maximizing level of consumption for each product on the table. Explain your answer by stating the utility maximizing rule. C.
Suppose Carlos has to choose between purchasing jewelry and water. Which of the following is the utility-maximizing rule that Carlos should follow while choosing the optimal quantities of these two goods? (Note: In the answer options that follow, MU stands for "marginal utility.") O (MU of Water) x (Price of Water) = (MU of Jewelry) x (Price of Jewelry) O MU of Water = MU of Jewelry MU of Jewelry %3D Price of Water MU of Water Price of Jewelry MU of Jewelry Price of Jewelry MU of Water %3D Price of Water Since water costs little and jewelry is expensive, it must follow that when people choose their optimal quantities of water and jewelry to purchase, the marginal utility they receive from the last piece of jewelry they buy is than the marginal utility they receive from the last gallon of water they buy.
John’s preferences for Orange (O) and lemons (L) are represented by the funtion U(O, L)= O+2L. The oranges cost £2 and the lemons £1. Given that John’s monthly income is £30 answer the following questions: What type of goods are oranges and lemons for John? What is the proportion to which John is willing to exchange Oranges for Lemons? 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 Lemons 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 Oranges. 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 Orange voucher of £20 or just £6 to spend…
Elizabeth makes $200 a week at het summer job and spends her entire weekly income on new running shoes and jeans, since these are only two items that provide utility to her. Furthermore,Elizabeth insists that for every pair of jeans she buys, she must also buy a pair of shoes. (without the shoes, the new jeans are worthless). Therefore, she buys the same number of pairs of shoes and jeans in any given week. a) If jeans cost $20 and shoes cost $20 , how many will Elizabeth buy of each?b) Suppose that the price of jeans rises to $30a pair , how many shoes and jeans will she buy?c) To what effect (income or substitution) do you attribute the change in utility levels between part a and part b
2
Income = $3 Px= $1, Py= $2
What happens to the original budget line if the price of good ? doubled? (i.e., Will there be a change in the slope and/or intercepts of the original budget line? If yes, what are those changes?). Interpret economically how the change in the price of good ? affects the consumption decision of the consumer
Sketch a typical downward sloping demand curve for bagels. What must be true for Bill to purchase additional bagels? Since the marginal utility of the bagel is less than the first, price will need to decrease to induce him to buy the additional bagels. Since the marginal utility of the second bagel is greater than the first, price will need to decrease to induce him to buy the additional bagels. Since the marginal utility of the second bagel is equal to the first, price will need to decrease to induce him to buy the additional bagels. Bill will not purchase additional bagels.
Mrs. Griffiths earns $5000 a week and spends her entire income on dresses and handbags, since these are the only two items that provide her utility. Furthermore, Mrs. Griffiths insists that for every dress she buys, she must also buy a handbag. i What is the algebraic equation for Mrs. Griffiths budget constraint if dresses cost S25 each and handbags cost $14 each? How many of each good will che buy and represent this on a budget line with handbags on the horizontal axis. Draw an indifference curve showing the optimum choice. Label the optimum as ii. 3. point A. What would be the marginal rate of substitution at the point that corresponds to the optimal consumption choice? Interpret the marginal rate of substitution. ii. Suppose the price of a dresses increases to $200 and income decreases to $4200. What is the new algebraic equation for Mrs. Griffiths budget constraint? Show the impact of the new budget line relative to the original budget line
Livi consumes both sushi (s) and green tea (t). The following table shows her marginal utility schedule for these two goods (note, MUs = 14 when the quantity increases from 0 to 1, and correspondingly for the other values). The price of sushi is $2 a piece and the price of green tea is $1 a cup. Q MUs MUt MUs/Ps MUt/Pt 1 14 13 ___ ___ 2 12 11 ___ ___ 3 11 10 ___ ___ 4 10 8 ___ ___ 5 9 7 ___ ___ 6 8 6 ___ ___ 7 6 3 ___ ___ 8 4 2 ___ ___ Calculate the MU/P for each good, and fill in the blanks in the table.…
Irene spends all of her income M on soda and chips. The price of soda is 2 per unit. Irene’s utility function is U (s, c) = 5 ln(1 + s) + ln(1 + c).Hint: throughout the question, you can assume M 》= 50 and pc 《 = 8 (these assumptions just rule out the possibility of corner solutions, but do not affect the way we solve the problem). (a) Derive Irene’s demand function for chips (as a function of her income and the price of chips). (b) Are chips an inferior good for Irene? Is the magnitude of the (total) effect of a decrease in price of chips greater or smaller than the corresponding substitution effect? (c) Obtain Irene’s inverse demand function for chips when her income is M = 50. Show that this function is decreasing and convex. (d) Is Irene’s Engel curve upward sloping or downward sloping? Explain in detail.