Carina buys two goods, food Fand clothing C, with the utility function U= FC+ F. Her marginal utility of food is MUF = C+ 1 and her marginal utility of clothing is MUC = F. She has an income of 20. The price of clothing is 4. a) Her demand for food is represented by F = 20/Pf , where P is price for Food. True/False. b) Calculate the income effects on Carina's consumption of food when the price of food rises from 1 to 4. c) Calculate the substitution effects on Carina's consumption of food when the price of food rises from 1 to 4. d) Determine the numerical size of the compensating variation (in monetary terms) associated with the increase in the price of food from 1 to 4.
Carina buys two goods, food Fand clothing C, with the utility function U= FC+ F. Her marginal utility of food is MUF = C+ 1 and her marginal utility of clothing is MUC = F. She has an income of 20. The price of clothing is 4. a) Her demand for food is represented by F = 20/Pf , where P is price for Food. True/False. b) Calculate the income effects on Carina's consumption of food when the price of food rises from 1 to 4. c) Calculate the substitution effects on Carina's consumption of food when the price of food rises from 1 to 4. d) Determine the numerical size of the compensating variation (in monetary terms) associated with the increase in the price of food from 1 to 4.
Chapter3: Preferences And Utility
Section: Chapter Questions
Problem 3.2P
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Transcribed Image Text:Carina buys two goods, food Fand clothing C, with the utility function U= FC + F. Her marginal
utility of food is MUF= C + 1 and her marginal utility of clothing is MUC = F. She has an income of
20. The price of clothing is 4.
a) Her demand for food is represented by F = 20/PF , where Pf is price for Food. True/False.
%3D
b) Calculate the income effects on Carina's consumption of food when the price of food rises from
1 to 4.
c) Calculate the substitution effects on Carina's consumption of food when the price of food rises
from 1 to 4.
d) Determine the numerical size of the compensating variation (in monetary terms) associated with
the increase in the price of food from 1 to 4.
Hint: Write the answers for b, c ,d as integer.
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