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 3P
To determine
Is the statement acceptable or not acceptable.
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Julio receives utility from consuming food (F) and clothing (C) as given by the utility function U(F,C) = FC. In addition,
the price of food is $2 per unit, the price of clothing is $7 per unit, and Julio's weekly income is $50.
What is Julio's marginal rate of substitution of food for clothing when utility is maximized? Explain.
Julio's marginal rate of substitution equals
A. 3.50, which is the price of clothing divided by the price of food.
B. 0.29, which is the price of food divided by the price of clothing.
C. 0.29, which is the price of clothing divided by the price of food.
D. 3.50, which is (minus) the slope of the budget line.
E. 3.50, which is Julio's level of satisfaction.
Suppose instead that Julio is consuming a bundle with more food and less clothing than his utility maximizing bundle.
Would this marginal rate of substitution of food for clothing be greater than or less than your answer above? Explain.
If Julio is instead consuming a bundle with more food and less clothing…
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?
Charles lives in New York City and loves to eat desserts. He spends his entire weekly allowance on jello and pie. A bowl of jello is priced at $1.25, and
a piece of pumpkin pie is priced at $5.00. At his current consumption point, Charles's marginal rate of substitution (MRS) of jello for pie is 3. This
means that Charles is willing to trade three bowls of jello per week for one piece of pie per week.
Does Charles's current bundle maximize his utility-in other words, make him as well off as possible? If not, how should he change it to maximize his
utility?
Charles could increase his utility by buying more jello and less pie per week.
O Charles could increase his utility by buying less jello and more pie per week.
Charles's current bundle maximizes his utility, and he should keep it unchanged.
Chapter 6 Solutions
Principles of Economics (12th Edition)
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Similar questions
- Recent research confirms that the demand for cigarettes is not only inelastic, but it also indicates that smokers with incomes in the lower half of all incomes respond to a given price increase by reducing their purchases by amounts that are more than four times as large as the purchase reductions made by smokers in the upper half of all incomes. How can the income and substitution effects of a price change help explain this finding?arrow_forwardCalculate the marginal rate of substitution if the consumer is will to leave good y from 100 to 60 to 40 to 30 to 25 to 23 to 22 to get for each an additional unit of x.arrow_forwardJack currently works 38 hours per week at a wage rate of $15 per hour. His marginal rate of substitution is $20 per hour. Is Jack's utility maximized? If yes, explain why. If no, explain why not and discuss what Jack should do in order to further increase utility.arrow_forward
- Suppose your classmate Hilary loves to eat dessert-so much so that she allocates her entire weekly budget to apple crisp and pie. The price of one bowl of apple crisp is $1.25, and the price of a piece of coconut crème pie is $5.00. At her current level of consumption, Hilary's marginal rate of substitution (MRS) of apple crisp for pie is 4. In other words, Hilary is willing to sacrifice four bowls of apple crisp for one piece of pie per week. Does Hilary's current consumption bundle maximize her utility? That is, does it make her as well off as possible? If not, how should she change it to maximize her utility? O Hilary could increase her utility by buying more apple crisp and less pie per week. Hilary could increase her utility by buying less apple crisp and more pie per week. O Hilary's current bundle maximizes her utility, and she should keep it unchanged.arrow_forwardBob lives in San Diego and loves to eat desserts. He spends his entire weekly allowance on pudding and pie. A bowl of pudding is priced at $1.00, and a piece of apple pie is priced at $4.00. At his current consumption point, Bob's marginal rate of substitution (MRS) of pudding for pie is 4. This means that Bob is willing to trade four bowls of pudding per week for one piece of pie per week. Does Bob's current bundle maximize his utility—in other words, make him as well off as possible? If not, how should he change it to maximize his utility? Bob could increase his utility by buying more pudding and less pie per week. Bob's current bundle maximizes his utility, and he should keep it unchanged. Bob could increase his utility by buying less pudding and more pie per week.arrow_forward3arrow_forward
- The Müller family has an income of € 4,000 per month. The family gives their entire income for Food and clothing. A piece of clothing costs € 40 and a shopping basket for groceries costs € 20. a) Draw the optimal consumption point. b) How high is the slope of the budget line and how is it to be interpreted? c) How high is the marginal rate of substitution at the optimal consumption point and what is the marginal rate to interpret the substitution? c) Ms. Müller decides to go back to work. She also earns € 4000 a month. Show it,arrow_forwardCho lives in Miami and loves to eat desserts. She spends her entire weekly allowance on pudding and pie. A bowl of pudding is priced at $1.50, and a piece of pumpkin pie is priced at $4.50. At her current consumption point, Cho's marginal rate of substitution (MRS) of pudding for pie is 5. This means that Cho is willing to trade five bowls of pudding per week for one piece of pie per week.arrow_forwardSuppose U = min(X, Y) and the price of X is 1, the price of Y is 1 and income is $12. If the price of X increases to 2, the substitution effect is 2 -1 0 -2arrow_forward
- Sarah has the following utility function: u(x, y) = 10x + 12y.arrow_forwardSuppose the price of bananas falls. Explain how the income and substitution effects work in the adjustment to a new level of banana consumption.arrow_forwardPizzas (₁) cost $9.00 each. A cup of coffee (₂) costs $3.00. Joe's income is $520.00, and his preferences are represented by the utility function ¹.2. Hammad's income is $790.00, and his preferences are represented by the utility function 29.¹. Assuming that both Joe and Hammad are maximizing their utility, what is Joe's marginal rate of substitution? Round your answers to two decimal places. What is Hammad's marginal rate of substitution?arrow_forward
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