Economics
Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
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Chapter 10, Problem 4P
To determine

Concept introduction:

Budget Line: It is defined as the combination of all goods that a consumer can buy exhausting his all income. Formula for the budget line is:

    Economics, Chapter 10, Problem 4P , additional homework tip  1

Here,

  • Economics, Chapter 10, Problem 4P , additional homework tip  2is the quantity of good X.
  • Economics, Chapter 10, Problem 4P , additional homework tip  3is the quantity of good Y.
  • Economics, Chapter 10, Problem 4P , additional homework tip  4is the total income.
  • Economics, Chapter 10, Problem 4P , additional homework tip  5is the price of good X.
  • Economics, Chapter 10, Problem 4P , additional homework tip  6is the price of good Y.

Marginal Utility: It is defined as the change in the total utility due to a change in the additional unit of a good. It may be diminishing, increasing, or constant.

    Economics, Chapter 10, Problem 4P , additional homework tip  7Or
      Economics, Chapter 10, Problem 4P , additional homework tip  8

    Here,
    • Economics, Chapter 10, Problem 4P , additional homework tip  9is the marginal utility.
    • Economics, Chapter 10, Problem 4P , additional homework tip  10is the total utility.
    • X is the quantity of any good.
    • N is the number of goods.

    Marginal Utility per dollar: It is the ratio of marginal utility to that of the price of a good. The formula to calculate the marginal utility per dollar is:

      Economics, Chapter 10, Problem 4P , additional homework tip  11Economics, Chapter 10, Problem 4P , additional homework tip  12

    Here,

    • Economics, Chapter 10, Problem 4P , additional homework tip  13is the marginal utility per dollar.
    • Economics, Chapter 10, Problem 4P , additional homework tip  14is the price of good X.

    Maximizing utility in the case of two goods: It states that the equilibrium level of consumption of two goods for a consumer is achieved when the marginal utility per dollar of the two goods are equal. This means that the following conditions must be fulfilled:

      Economics, Chapter 10, Problem 4P , additional homework tip  15

    Here,
    • Economics, Chapter 10, Problem 4P , additional homework tip  16is the marginal utility of good X.
    • Economics, Chapter 10, Problem 4P , additional homework tip  17is the marginal utility of good Y.
    • Economics, Chapter 10, Problem 4P , additional homework tip  18is the price of good X.
    • Economics, Chapter 10, Problem 4P , additional homework tip  19is the price of good Y.

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