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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Chapter 6.A, Problem 2P
To determine
Plot the
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What is the concept of diminishing marginal utility of consumers? How consumer use Marginal Rate of Substitution to reach consumer equilibrium level where MRTS = Px/Py?
Sally consumes two goods, X and Y. Her utility function is given by the expression U = 2XY3. The current market price for X is $20, while the market price for Y is $10. Sally's current income is $500.
a. Write the equation for Sally's budget constraint. What is the slope of her budget line?
b. Determine the X,Y combination which maximizes Sally's utility, given her budget constraint.
Sally consumes two goods, X and Y. Her utility function is given by the expression
U(X, Y) = 3XY2. The current market price for X is $10, while the market price for Y is $5.
Sally's current income is $500.
a. Write the expression for Sally's budget constraint. Graph the budget constraint and determine its
slope.
b. Determine the X', Y’ combination which maximizes Sally's utility, given her budget constraint.
Show her optimum point on a graph. (Partial units for the two quantities are possible.)
c. Calculate the impact on Sally's optimum market basket of an increase in the price of X to $15.
What would happen to her utility as a result of the price increase? Be specific.
Chapter 6 Solutions
Principles of Economics (12th Edition)
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- Jason has the following utility function: U = F2C where F is food and C is clothing. Clothing is measured on the vertical axis while food is measured on the horizontal one. Suppose the price of food is €3 per unit, the price of clothing is €2 per unit and that Jason’s income is €36. Calculate the number of units of clothing that Jason consumes in equilibrium. Mary has a different utility function than Jason in Question 2 but faces the same prices as him. Suppose she also only consumes food and clothing but we do not know her utility function or her income. What is Mary’s marginal rate of substitution of food for clothing when her utility is maximized? Explain your answer briefly.arrow_forwardPat divides a $900 monthly income between the consumption of food (X) and all else (Y). Pat’s preferences can be described by the following utility function: U = XY. a) If the price of food is $1, and of all else is $2, how much of each good will Pat choose? b) If now the price of food rises to $2, how much of each good will Pat choose? c) Explain this change in terms of income and substitution effects. d) How much would Pat be willing to pay to avoid this price increase?arrow_forwardAmbrose's brother Anthony has an income of $75 and a utility function U(x1, x2) = 20x1/21 + x2. The price of good 1 (nuts) is $2 and the price of good 2 (berries) is $1. How many units of nuts will Anthony demandarrow_forward
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