Economics: Principles and Policy (MindTap Course List)
13th Edition
ISBN: 9781305280595
Author: William J. Baumol, Alan S. Blinder
Publisher: Cengage Learning
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Chapter 25, Problem 3TY
To determine
The construction of consumption function and calculate the marginal propensity to consume (MPC).
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You are working as an economic consultant and investigating the intertemporal
consumption choice of clothes. Your colleague suggests using the utility function:
u = min(c1, c2),
where c₁ is the consumption of clothes today and C2 is the consumption of clothes
tomorrow. Do you agree with your colleagues suggestions? Explain and if relevant
suggest an alternative.
Rajiv is buying pizza and salad for a company lunch. Suppose that a slice of pizza costs $2.00, and a bowl of salad costs $4.00.
Let E be the amount in dollars that Rajiv spends on pizza and salad. If Rajiv buys P slices of pizza and S bowls of salad, then the total amount of
money he spends (E) can be represented by the equation
Now rearrange the equation you wrote above so that S is written in terms of E and P. The quantity of salad he buys can be represented by the
equation
Suppose Rajiv has $32.00 to spend on pizza and salad; that is, E = $32.00.
Complete the following table with the values of P or S that make the equation true.
Hint: To complete the first row, determine the number of salad bowls Rajiv can purchase with $32.00, when the number of pizza slices he purchases
is 0.
Budget
Pizza
Salad
(Dollars)
(Slices)
(Bowls)
32.00
32.00
8
32.00
Use the black line (plus symbols) to plot the line illustrating the combinations of pizza and salad that Rajiv can purchase with a budget of…
Suppose that John's MPC is constant at 4/5. If he had no income at all, he would have to
borrow $2,000 to meet all his expenses. Graph John's consumption function and write it out
algebraically. Using the formula for John's consumption function, find his break-even point.
Chapter 25 Solutions
Economics: Principles and Policy (MindTap Course List)
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- write a short note about the following variables and support your answers by giving examples for each variable: TFC , TC , VC , MCarrow_forwardFrom the graph above, complete the aggregate consumption function from the information provided. C = ___ + ___Yarrow_forward2. What is the domain and range of the consumption function C = 12 + 0.3Y? Write them as a set. What is the economic interpretation of 0.3 here?arrow_forward
- Tim is buying pizza and salad for a company lunch. Suppose that a slice of pizza costs $4.00, and a bowl of salad costs $5.00. Let ♬ be the amount in dollars that Tim spends on pizza and salad. If Tim buys P slices of pizza and S bowls of salad, then the total amount of money he spends (B) can be represented by the equation Now rearrange the equation you wrote above so that S is written in terms of E and P. The quantity of salad he buys can be represented by the equation Suppose Tim has $40.00 to spend on pizza and salad; that is, E = $40.00. Complete the following table with the values of P or S that make the equation true. Hint: To complete the first row, determine the number of salad bowls Tim can purchase with $40.00, when the number of pizza slices he purchases is 0. Budget Pizza (Dollars) (Slices) 40.00 0 40.00 5 40.00 Use the black line (plus symbols) to plot the line illustrating the combinations of pizza and salad that Tim can purchase with a budget of $40.00. SALAD (Bowis) 14…arrow_forwardThe function Q = F(p,ps,y) describes how the monthly demand, Q (measured in 100s of Widgets), for Grinch Inc. Widgets depends on the variables: • p = the price/Widget that Grinch Inc. sets (measured in $). • Ps= average price of substitutes for Grinch Inc. Widgets (measured in $). • y = average disposable income in the market for Widgets (measured in $1000s). When average disposable income in the market is $4200 and Grinch Inc.s price is $12 and the average price of substitutes is $11... ● Q = 66 •Op=-0.28 2ps = 0.52 ● Qy = 0.31 If average monthly income increases to $4400 and the average price of substitutes increases to $11.35, by approximately how much can Grinch Inc. increase their price while keeping demand for their Widgets fixed at Q = 66 ? Ο Δp = 0.87 O There is no way to estimate this from the given information.. Ο Δρ = 0.53 O Ap = 0.72arrow_forwardSuppose Maria would spend $1500 per year on travel, even if her annual income were zero. As her income rises, she would spend 30% of each additional dollar of income on travel. a. Write a mathematical equation that describes the functional relation between Maria travel spending (T) and her income (Y). b. Draw a graph from the equation developed in part a above.arrow_forward
- Draw a consumption function for an individual whereS=-250+0.3Y. Show the change that would result from an increase in Income.arrow_forwardAccording to economists, the satisfaction people get from their consumption activities is called:arrow_forwardElena consumes bundles of food and transportation. In order to understand her behavior, we use a graph of her consumption space in which we draw two axes. We measure food in the horizontal axis and transportation in the vertical axis. Which of the following bundles has the largest amount of food (if the bundles are written consistently with the way we graph consumption)? (80, 100) (99,150) (100,80) (95,95) (98,98)arrow_forward
- Why would you rather use real variables in an economic analysisarrow_forwardSuppose that the least amount of goods and services that Roberto will consume in a year is $40,000. Roberto tends to save $0.30 of every dollar of disposable income that he makes. Use the given line to graph Roberto's consumption function for disposable income levels between $0 and $200,000. Move each endpoint to the appropriate spot on the graph.arrow_forwardcan you please provide a explanation with any mathematical working outarrow_forward
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