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Question 2: Homer Simpson, our representative consumer, consumes varying amounts of beef and chicken. Assume that B quantity of beef consumed, and that C quantity of chicken consumed. Homer's utility function is given as: U-BC Assume further that the price of beef is $4, the price of chicken is $2, and that Homer's income is $200. a) Find the optimal hundle for Homer. Now assume that the price of chicken increases from $2 to $4 b)Find Homer's new optimal bundle c)What is the income and the substitution effect in part (b) d)What if the price of chicken goes up, but the government offers to compensate Homer for this loss of purchasing power. That is, Mayor Quimby offers to mail Homer a check, in an effort to keep Homer from feeling worse off. Homer still faces the higher chicken price, but doesn't experience a change in utility. That is, for Homer to be no worse off after the price increase, the government check must be large enough to keep Homer on his original indifference curve as in part (a). By how much should the government compensate him?

Question 2: Homer Simpson, our representative consumer, consumes varying amounts of beef and chicken. Assume that B quantity of beef consumed, and that C quantity of chicken consumed. Homer's utility function is given as: U-BC Assume further that the price of beef is $4, the price of chicken is $2, and that Homer's income is $200. a) Find the optimal hundle for Homer. Now assume that the price of chicken increases from $2 to $4 b)Find Homer's new optimal bundle c)What is the income and the substitution effect in part (b) d)What if the price of chicken goes up, but the government offers to compensate Homer for this loss of purchasing power. That is, Mayor Quimby offers to mail Homer a check, in an effort to keep Homer from feeling worse off. Homer still faces the higher chicken price, but doesn't experience a change in utility. That is, for Homer to be no worse off after the price increase, the government check must be large enough to keep Homer on his original indifference curve as in part (a). By how much should the government compensate him?

Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
8th Edition
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter21: The Theory Of Consumer Choice
Section: Chapter Questions
Problem 1PA
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Question 2: Homer Simpson, our representative consumer, consumes varying amounts of beef and chicken. Assume that B = quantity of beef consumed, and that C = quantity of chicken consumed, Homer's utility function is given as: U=BC Assume further that the price of beef is $4, the price of chicken is $2, and that Homer's income is $200. a)Find the optimal bundle for Homer. Now assume that the price of chicken increases from $2 to $4 b)Find Homer's new optimal bundle c)What is the income and the substitution effect in part (b) d)What if the price of chicken goes up, but the government offers to compensate Homer for this loss of purchasing power. That is, Mayor Quimby offers to mail Homer a check, in an effort to keep Homer from feeling worse off. Homer still faces the higher chicken price, but doesn't experience a change in utility. That is, for Homer to be no worse off after the price increase, the government check must be large enough to keep Homer on his original indifference curve as in part (a). By how much should the government compensate him?
Transcribed Image Text:Question 2: Homer Simpson, our representative consumer, consumes varying amounts of beef and chicken. Assume that B = quantity of beef consumed, and that C = quantity of chicken consumed, Homer's utility function is given as: U=BC Assume further that the price of beef is $4, the price of chicken is $2, and that Homer's income is $200. a)Find the optimal bundle for Homer. Now assume that the price of chicken increases from $2 to $4 b)Find Homer's new optimal bundle c)What is the income and the substitution effect in part (b) d)What if the price of chicken goes up, but the government offers to compensate Homer for this loss of purchasing power. That is, Mayor Quimby offers to mail Homer a check, in an effort to keep Homer from feeling worse off. Homer still faces the higher chicken price, but doesn't experience a change in utility. That is, for Homer to be no worse off after the price increase, the government check must be large enough to keep Homer on his original indifference curve as in part (a). By how much should the government compensate him?
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