Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Question
Chapter 6, Problem 1.5P
(a)
To determine
Equation for original the budget constrain.
(b)
To determine
The price of orchid and fern.
(c)
To determine
Equation for the new budget constrain.
(d)
To determine
The price of orchid and fern in the new budget constrain.
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Suppose that your family has just decided to adopt a cat named Hailey. You have a monthly budget of $40 that you can choose to spend on either cat
food or other consumption goods. Assume the price of a can of cat food is $5 for the first 2 cans, but then it drops to only $3 per can for each
additional can. All other consumption goods will be treated as a composite good, so you can think of this as simply the cash left over to spend on other
items after buying cat food.
On the following graph, use the green points (triangle symbol) to graph your family's budget constraint.
Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.
OTHER CONSUMPTION (Amount per month)
50
45
40
35
30
25
20
15
10
5
Budget Constraint
?
Suppose you go to Trader Joe's to buy fruit for the week. You only like apples (A) and bananas
(B) and your weekly fruit budget is $11. When you arrive at Trader Joe's you notice that the
price of an apple is $1.00 and the price of a banana is $0.25.
QUESTION #1: How many apples and bananas should you buy?
QUESTION #2: When you have found the answer, draw a diagram that shows the outcome.
Step #1. Determine your preferences. Let's suppose that your preferences can be represented
by the following utility function: U(A, B) = AªBß = A0.40 B0.60
FYI: This utility function is known as a Cobb-Douglas utility function. It is the most commonly used function used in
economics! The reason we like it so much is that it has:
1. Constant returns (double your consumption of A and B and your utility doubles); a + B = 1
2. Diminishing marginal utility (the extra utility gained from consuming A (or B) decreases as you consume more of
the A good (or B good); a 0.40); B > a.
Step #2: Determine your…
Suppose you go to Trader Joe's to buy fruit for the week. You only like apples (A) and bananas
(B) and your weekly fruit budget is $11. When you arrive at Trader Joe's you notice that the
price of an apple is $1.00 and the price of a banana is $0.25.
QUESTION #1: How many apples and bananas should you buy?
QUESTION #2: When you have found the answer, draw a diagram that shows the outcome.
Step #1. Determine your preferences. Let's suppose that your preferences can be represented
by the following utility function: U(A, B) = AªBB = A0.40 B0.60
FYI: This utility function is known as a Cobb-Douglas utility function. It is the most commonly used function used in
economics! The reason we like it so much is that it has:
1. Constant returns (double your consumption of A and B and your utility doubles); a + B = 1
2. Diminishing marginal utility (the extra utility gained from consuming A (or B) decreases as you consume more of
the A good (or B good); a 0.40); B > a.
Step #2: Determine your…
Chapter 6 Solutions
Principles of Economics (12th Edition)
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