3. Returning to problem 3 on Homework 2 in which Emma is endowed with (i.e., starts off with) 160gallons of milk and 100 apples, suppose at the original prices pm = $2 and pa= $1 she chooses toconsume 120 gallons of milk and 180 apples.0Draw her budget set and equilibrium consumption bundle (including the maximal indifferencecurve).b. Show that if pm were to increase, she would end up better-off. Explain why.a.4. Consider a consumer whose utility function isu(x, y)=√xy (MRS(x, y) =)Xa. Assume the consumer has income $120 and initially faces the prices px= $1 and py=$1. How much xand y would they buy? Draw the budget constraint and the demands.b. Next, suppose the price of x were to increase to $4. How much would they buy now? Draw this in thesame figure.c. Decompose the total effect of the price change on demand for x into the substitution effect and theincome effect. That is, determine precisely how much of the change is due to each of the componenteffects. (Hint: See the lecture notes for the two properties that determine the location of "-", thereference point for distinguishing the income and substitution effects.)1

The objective of the question is to understand the consumer's behavior in response to changes in…

Answered: 3. Returning to problem 3 on Homework 2…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils. Does John show diminishing marginal utility for Coke, or does he show increasing marginal utility for Coke? Supposethat John has $3 in his pocket. If Cokes cost $1 each and John is willing to spend one of his dollars on purchasing a first can of Coke, would he spend his second dollar on a Coke, too? What about the third dollar? If John’s marginal utility for Coke keeps on increasing no matter how many Cokes he drinks, would it be fair to say that he is addicted to Coke?
3. Finding the optimal combination of two goods - $2. Suppose that Larry buys Larry enjoys consuming both cheese and fruit. Each pound of cheese costs Pc = $1, and each pound of fruit costs PF 300 pounds of cheese and 200 pounds of fruit per year. The following graphs show his marginal utility curves for cheese and fruit. At his current consumption level, Larry's marginal utility from consuming the last pound of cheese he bought is MUC S 30 utils per pound, and his marginal utility from consuming the last pound of fruit he bought is MUF = 30 utils per pound. 60 40 30 IL 20 10 400 500 600 50 40 A 30 B C D 20 10 0 0 100 Is Larry currently maximizing his utility? Combination 200 300 CHEESE (Pounds per year) 300, 30 (Pounds per Year) 200 400 300 No; he could buy less cheese and more fruit, not spend any more money, and be better off. O No; he likes fruit and cheese more than other goods, so he should buy more of both. O No; he could buy more cheese and less fruit, not spend any more money,…
3) Suppose Joe's utility for lobster (L) and soda (S) can be represented as U =10.5 50.5 MUL=0.5 L -0.5 s0.5, MUs=0,5 L0.5 s-0.S. Joe walks into a restaurant with $72. Lobsters cost $18 each and sodas cost $2 each. How much lobster and soda will Joe consume if he intends to spend all his money? (There are no tax and no tips.)
John likes Coca-Cola. After consuming one Coke, John has a total utility of 10 utils. After two Cokes, he has a total utility of 25 utils. After three Cokes, he has a total utility of 50 utils. Does John show diminishing marginal utility for Coke or does he show increasing marginal utility for Coke? Suppose that John has $3 in his pocket. If Cokes cost $1 each and John is willing to spend one of his dollars on purchasing a first can of Coke, would he spend his second dollar on a Coke, too? What about the third dollar? If John’s marginal utility for Coke keeps on increasing no matter how many Cokes he drinks, would it be fair to say that he is addicted to Coke? *use tables and/or graphs if possible, please original work
4 Emily goes camping on the weekend and eats marshmallows (M) and crackers (C) there. She wants to match 1 marshmallow with 2 crackers, but does not eat in different proportion (i.e., perfect com- plement). The price of a marshmallow is 10 cents and the price of a cracker is 5 cents, and she spend up to $3 in total. a) Write down a utility function which represents Emily's preferences over marshmallows and crackers. b) How many marshmallows and crackers is she going to consume? (Hint: the first-order conditions will not help; draw the budget constraint and the indifference curves and look at the highest one that intersect the budget constraint). c) What is the exact value of Emily's indirect utility?
Joe is currently in consumer equilibrium by consuming cheese and crackers, such that the last cracker consumed yielded 8 utils and the last piece of cheese consumed yielded 12 utils. Assume the price of crackers is two cents per cracker and the price of cheese is three cents per piece. If the price of crackers increases to four cents, Joe should his consumption of crackers and his marginal utility from crackers will and also his consumption of cheese and his marginal utility from cheese will (Assume he is in the downward sloping portion of the MU curve.) Ο Ο Ο decrease; increase; increase; decrease increase; increase; increase; increase increase; decrease; increase; decrease increase; increase; decrease; decrease
7. Suppose U = x₁x2 and the budget constraint is given as x₁ + 1 = B, solve for x and 1-α 8. Suppose U = xx and our budget is given as p₁x₁+P2x2 = m, where m is our income. Solve for solve for x and x₂. 9. Suppose now we want to minimize our expenditure while achieving a certain amount of utility. So say our budget is given as P₁x₁ + P2x2, which we want to minimize, while our utility x and x = u, where u is the level of utility we would like to achieve. Solve for x and x₂.
Suppose utility can be measured by "utils" and that Jim buys both coffee and bagels. The price of coffee is $2 and the price of a bagel is $3. If Jim is currently consuming coffee and bagels such that the marginal utility from the last cup of coffee consumed was 6 utils and the marginal utility from the last bagel consumed was 12 utils, is Jim maximizing utility? Why or why not? If not, what should Jim do? Explain in detail.
2. Tom spends all his $100 weekly income on two goods, apples and bananas. His utility function is given by U (A, B) = AB, where A and B stand for the quantity of apples and bananas consumed by Tom. If PA = $4 and PB= $10, how many apples and bananas will he consume? Make sure you write out the utility maximization problem explicitly, including the decision variable(s). What if his utility function is given by U (A, B) = A0.5B 0.5?
1. Suppose Frank enjoys traveling and his utility is a function of the number of airplane trips he takes and the number of bus rides he takes. His utility function is given by U(b,p) = 3b0-4p0.8. A trip on a plane costs $400, a trip on the bus costs $50 and Frank has $3,000 to spend on travel. a. Draw Frank's budget line on a graph with bus trips on the vertical axis. b. Calculate AND INTERPRET the slope of Frank's budget line. c. Draw a representative indifference curve on your graph and provide a function that describes the slope of this indifference curve (i.e., find Frank's marginal rate of substitution). What is the INTERPRETATION of the marginal
Inayah is a rational consumer who consumes milk and cookies only from her monthly income of Rs. 1,500. If the price of milk is Rs. 500 per liter and the price of one pack of cookie is Rs. 300, answer the following questions: a) Given the information above write the equation of the budget line and illustrate the same through the two-dimensional labeled diagram. b) If Inayah spends all of her income on consuming one good, find i. how much cookies she could afford? ii. how much milk she could consume? c) Identify the impact of an increase in the income from Rs. 1,500 to Rs. 1,800 on Inayah’s consumption level. Also illustrate it using the two-dimensional labeled diagram. d) Assume that Inayah’s consumption of milk and cookies give her following level of utility: Quantity MU milk MU cookies 1 400 450 2 350 200 3 200 150 4 100 100 5 70 60 6 30 30 7 0 0 i. Find the optimal level of consumption. ii. Find the consumer equilibrium using the two-dimensional labeled…
1. Suppose that there are two breakfast options, pancakes and waffles. Kwame only cares about the calories he gets from his breakfast he wants to consume as much as possible, no matter the food. Suppose that a waffle has thrice as many calories as a pancake. What do Kwame's indifference curves look like, illustrated with waffles on the y axis and pancakes on the x - axis?

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