Economics
Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
Question
Book Icon
Chapter 10.A, Problem 9P
To determine

Indifference Curve: The graph that shows all those combinations of goods that provide the same level of satisfaction is known as the indifference curve. They are downward slopping curve and convex to the origin. The two indifference curve lines never intersect each other.

Perfect Substitute Good: all those goods which are substitute for each other that can be used to one another. Example tea and coffee.

Marginal Rate of Substitution: It is defined as the quantity of goods sacrificed for an additional unit of another good. The formula for it is:

    Economics, Chapter 10.A, Problem 9P , additional homework tip  1

Here,

  • Economics, Chapter 10.A, Problem 9P , additional homework tip  2is the marginal rate of substitution of Economics, Chapter 10.A, Problem 9P , additional homework tip  3and Economics, Chapter 10.A, Problem 9P , additional homework tip  4
  • Economics, Chapter 10.A, Problem 9P , additional homework tip  5is the marginal utility of Economics, Chapter 10.A, Problem 9P , additional homework tip  6
  • Economics, Chapter 10.A, Problem 9P , additional homework tip  7is the marginal utility of Economics, Chapter 10.A, Problem 9P , additional homework tip  8

Optimality Rule: According to the indifference curve approach, the consumer achieves its optimum bundle at a appoint where

    Economics, Chapter 10.A, Problem 9P , additional homework tip  9

Here,

  • Economics, Chapter 10.A, Problem 9P , additional homework tip  10is the quantity of good X.
  • Economics, Chapter 10.A, Problem 9P , additional homework tip  11is the quantity of good Y.
  • Economics, Chapter 10.A, Problem 9P , additional homework tip  12is the total income.
  • Economics, Chapter 10.A, Problem 9P , additional homework tip  13is the price of good X.
  • Economics, Chapter 10.A, Problem 9P , additional homework tip  14is the price of good Y

However, in the case of a perfect substitute good, the optimal consumption rule is slightly different, in such a situation we have three conditions:

  • If MRS is greater than the price ratio then optimal consumption is Economics, Chapter 10.A, Problem 9P , additional homework tip  15
  • If MRS is less than the price ratio then optimal consumption is Economics, Chapter 10.A, Problem 9P , additional homework tip  16
  • If MRS is equal to the price ratio then optimal consumption is Economics, Chapter 10.A, Problem 9P , additional homework tip  17

Blurred answer
Students have asked these similar questions
Where can I go to get my own wax supplies?
Problem 2. If the consumer preference can be represented by a CES function with δ = 0.5, i.e. u(x, y) = x0.5 + y0.5. Let the prices and income be (px, py, w).  1. Set up the Lagrangian expression.2. Take the first-order conditions.3. Substitute into budget constraint to derive the optimal consumption bundles.
1. A town relies on four different sources for its non-drinking water needs: dam water, reclaimed water, rain water, and desalinated water. The different sources carry different risks and costs. For instance, desalinated water is fully reliable due to abundant sea water, but it is more expensive than other options. Reclaimed water also has relatively lower risk than rain or dam water since a certain amount can be obtained, even during the dry. season, by the treatment of daily generated waste water. Using any of the four options requires an investment in that resource. The return on a particular water source is defined as the amount of water generated by the source per dollar of investment in it. The expected returns and standard deviations of those returns for the four water sources are described in the following table: Water resource Expected return St. Deviation Dam water 2.7481 0.2732 Reclaimed water 1.6005 0.0330 Rain water 0.5477 0.2865 Desalinated water 0.3277 0.0000 Higher…
Knowledge Booster
Background pattern image
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education