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: Here, is the marginal rate of substitution of and is the marginal utility of is the marginal utility of Optimality Rule: According to the indifference curve approach, the consumer achieves its optimum bundle at a appoint where Here, is the quantity of good X. is the quantity of good Y. is the total income. is the price of good X. is 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 If MRS is less than the price ratio then optimal consumption is If MRS is equal to the price ratio then optimal consumption is

Question

Want to see the full answer?

Answer 1

Question

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:

Here,

is the marginal rate of substitution of and

is the marginal utility of

is the marginal utility of

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

Here,

is the quantity of good X.

is the quantity of good Y.

is the total income.

is the price of good X.

is 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

If MRS is less than the price ratio then optimal consumption is

If MRS is equal to the price ratio then optimal consumption is

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

not use ai please

1. Lisa has $48 per week set aside for coffees (x) and lunches (z). The price of coffee is $4 and lunches are $6. What is Lisa's budget line equation (with z on the left-hand side)? Graph the budget line, and show how it changes when the price of lunches rise to $8 (including intercepts). What is the new budget line equation? 2. Suppose utility for a consumer of movies (x) and golf (z) is U = 20x0.420.5. The consumer has set aside $1000 to consumer movies and golf for a year. a. If the price of movies is $20 and the price of golf is $40, what is the utility-maximizing consumption of movies and golf? b. Show the optimal consumption bundle on a graph, showing a budget line (with intercepts), a tangent indifference curve, and the optimal choice. 3. Sam has set aside $480 for entertainment this month, which is golf (x) and/or bowling (z). A round of golf is $40 and a night of bowling is $30. His utility function is U = 3x + 2z. a. What is his MRS? b. Solve for the optimal choice of golf…

Question Seven There are specific applications of the hidden-action or moral hazard model. Consider employment contracts signed between a firm's owners and a manager who runs the firm on behalf of the owners. The manager is offered an employment contract which they can accept and decide how much effort, e ≥ 0, to exert. Suppose that an increase in effort, e, increases the firm's gross profit, not including payments to the manager, but is personally costly to the manager and the firm's gross profit, Пg, takes the following form: Пg = e +ε, ε~N(0,2). Let s denote the salary, which may depend on effort and/or gross profit, depending on what the owner can observe, offered as part of the contract between the owner and manager. Suppose that the manager is risk averse and has a utility function with respect to salary of the form: Aσ² U(W)=μ- 2 a) Derive the optimal result of the owner's expected net profit where there is full information and state what it implies. b) Suppose now that the…