It is December, and John is shivering in his apartment when the phone rings, it is Jame, one ofthe students whose price theory problems he graded last term. Jame asks if John would beinterested in spending the month of January in his apartment. Jame plans to go to Aspen for themonth and so his apartment will be empty. All Jame asks is that John pay the monthly servicecharge of $50 charged by his landlord and the heating bill for the month of January. Since hisapartment is much better insulated than John's, it only costs $1 per month to raise thetemperature by 1 degree. John thanks Jame and says he will let Jame know tomorrow. Johnputs his earmuffs back on and muses. If he accepts Jame's offer, he will still have to pay renton his current apartment but he won't have to heat it. If he moved, heating would be cheaper,but he would have the $50 service charge. The outdoor temperature averages 25 degreesFahrenheit in January, and it costs him $2 per month to raise his apartment temperature by 1degree. John is still grading homework and has $120 a month left to spend on food and utilitiesafter he has paid the rent on his apartment. The price of food is still $1 per unit.(a) Draw John's budget line for January if he moves to Jame's apartment and on the same graph,draw his budget line if he doesn't move.(b) After drawing these lines himself, John decides that he would be better off not moving.From this, could you work out, using the principle of revealed preference that what temperatureJohn must plan to set in his apartment?(c) John calls Jame and tells him his decision. Jame offers to pay half the service charge. DrawJohn's budget line if he accepts Jame's new offer. John now accepts Jame's offer. From the factthat John accepted this offer, what temperature John plans to set in Jame's apartment?

A budget line is a graphical representation that shows all the combinations of products that a…

(a) Draw John's budget line for January if he moves to Jame's apartment and on the same graph, draw his budget line if he doesn't move. (b) After drawing these lines himself, John decides that he would be better off not moving. From this, could you work out, using the principle of revealed preference that what temperature John must plan to set in his apartment? (c) John calls Jame and tells him his decision. Jame offers to pay half the service charge. Draw John's budget line if he accepts Jame's new offer. John now accepts Jame's offer. From the fact that John accepted this offer, what temperature John plans to set in Jame's apartment?

(a) Draw John's budget line for January if he moves to Jame's apartment and on the same graph, draw his budget line if he doesn't move. (b) After drawing these lines himself, John decides that he would be better off not moving. From this, could you work out, using the principle of revealed preference that what temperature John must plan to set in his apartment? (c) John calls Jame and tells him his decision. Jame offers to pay half the service charge. Draw John's budget line if he accepts Jame's new offer. John now accepts Jame's offer. From the fact that John accepted this offer, what temperature John plans to set in Jame's apartment?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter4: Utility Maximization And Choice

Section: Chapter Questions

Problem 4.2P

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