Foundations of Economics (8th Edition)
Foundations of Economics (8th Edition)
8th Edition
ISBN: 9780134486819
Author: Robin Bade, Michael Parkin
Publisher: PEARSON
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Chapter 13, Problem 7MCQ
To determine

Choose the correct answer from the following options regarding the paradox of value arises when people ___.

  1. Prefer to buy cheap goods rather than expensive goods
  2. Spend more on expensive useless goods than on cheap useful goods
  3. Buy so much of a useful good that its price falls
  4. Get the same marginal utility per dollar from cheap useful goods and useless expensive goods.

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The preferences of a consumer are represented by the following utility function: U = min (×1, 2x2) If income is 100 and p1=p2=1 a) What is the optimal bundle? b) If p₁=4, what is the new optimal bundle? c) If p2=4, what is the new optimal bundle? d) Decompose the price effect into income and substitution effect and provide a graphical representation of your results.
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