is a key additional assump- The assumption that preferences are tion to deduce that the area under the curve shown in Figure 2 below is a measure of a consumer's utility. A x:(Pi, Pj, y) Pa Pb Price of Good i Figure 2. Marshallian Demand for Good i Qty of Good i
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- Candance’s general budget constraint for the two goods is a follow: B= PxX + PyY Also, her marginal utilities are: MUx =30X^2Y^3 and MUy =30X^3Y^2 A. Derive the Hicksian demand for good X at these prices. Hint, you need to choosethe three correct equations you’ve derived above and solve simultaneously. Also,draw both demand curves on the same graph.B. Using the information derived in parts A and B, what is the substitution effect andincome effect obtained when changing the price of good X from a value of 1 to avalue of 2.Suppose a consumer has a monthly income of m = 100 which she spendson two commodities: french fries (x1) and beef jerky (x2). The price offrench fries is p1 = 2 and the price of beef jerky is p2 = 5. (e) What is the slope of the budget line? Provide an economicinterpretation of this number.(f) Because of Mad Cow Disease, the price of beef jerky increasesto $10 (lower supply of beef). On a new graph, plot the originaland new budget constraint clearly identifying how the budgetconstraint has changed. What is the new relative price of beefjerky in terms of french fries?(g) Because of severe shortages, Congress passes the Jerky ReliefAct which limits each consumer to purchase at most 5 packs ofjerky. Show on a graph how this affects the consumer’s budgetset. Answer all three.a good is normal, then an increase in the price of the good will lead to which of the following to be true for this good? (Assume that there are only two goods, the individual's preferences lead to well-behaved preferences with strictly convex indifference curves and an interior solution for all budgets). Let SE = substitution effect, IE = income effect) (a) The magnitude of the IE for this good must be larger than the magnitude of the SE (b) The magnitude of the SE for this good must be larger than the magnitude of the IE (c) The good could be a Giffen good d) The good must be an ordinary good ( (e) None of the above
- Compare the following two pairs of goods:• Coke and Pepsi• Skis and ski bindingsa. In which case are the two goods complements? Inwhich case are they substitutes?b. In which case do you expect the indifferencecurves to be fairly straight? In which case do youexpect the indifference curves to be very bowed?c. In which case will the consumer respond more to achange in the relative price of the two goods?Intialy mr. John is at equilibrium such that the last dollar spent on each of several products gives hi identical marginal utility i.e MUorange/porange=MUApple/pApple=...=MUn/pn where Mu orange =aditional utility derived from consuming one more unit of Apple ,pApple=price of a unit of Apple etc Q.how will Mr.Jhon react if the price of orange and other goods remain constant?and how can the equilibrium be restored?Ma1. Please give only typed answer. Assume the following expendiexpenditure function. (a) Interpret this function. In particular, what will happen to the optimal expenditure, if the consumer wanted to maintain a high level of utility? (b) Calculate Hicks demand for good 2. (c) Suppose that p1 = 1, p2 = 1 and that U = 28. Calculate and interpret the variation compensation if the price of good 2 increases by $1.
- Draw the following scenario: Assume a piece of jewelry and 2 consecutive drops in its price. Also consider Alia’s demand to be relative elastic in the price range from ? 1to ? 2, and that she perceives jewelry as a Giffen good in the price range from ? 2to ? 4. Draw her price-consumption curve with well-behaved preferences. Clearly label your graph. The graph may be something like this:A consumer has GH¢600 to spend on two commodities, A and B. Commodity A costs GH¢20 per unit and Commodity B costs GH¢30 per unit. Suppose that the utility derived by the consumer from x units of Commodity A, and y Commodity B is given by the Cobb-Douglas utility functionU (x, y) = 10x0.6y0.4a. How many units of each commodity should the consumer buy tomaximize utility?b. Is the budget constraint binding?The MU/P equalization principle means consumerswill exhaust their expenditure budget sothat, in the end, the MU/P ratio isa. zero for each good.b. higher for goods the consumer wants the most.c. maximized for the goods the consumer wantsthe most.d. the same for each good.
- Romania has preferences represented by the utility function U(x, y) 2x and 2y. She consumes 10 units of good x and 6 units of good y. If her consumption of good x is lowered to 4, how many units of y must she have in order to be exactly as well off as before? The answer is 12 not sure how to get itFor the case of two goods, give an example of a utility function U(x1, x2) that represents the preferences of a consumer who regards the two goods as perfect complements. Next, take the transformation f(U) = U³ of the your example utility function and explain if this newly gener ated function represents the original preferences. Further, provide clear arguments supporting or rejecting the claim that "f(U(x1, x2)) must be strongly increasing in (x1, x2)."The utility function of an individual is given by u=f(x,y)=x3/4y1/4 Determine the optimal quantities of the 2 goods if its given that the price of good x is sh. 6 per unit, price of good y is sh. 3 per unit and the income of the individual is 120. Solve using max of utility approach and use langregean approach?
