Q10. Consider a utility function: U (F,C) = FC so MU_F = C and MU_C = F. In Case 1, Total income is $100 , per unit prices of Food (F) are $2 , per unit prices of Cloth (C) are $10 In Case 2, Total income is $100 , per unit prices of Food (F) are $2 , per unit prices of Cloth (C) are $15 Find the following for both cases, and contrast Case 2 with Case 1: a. What is the value of MRS at the optimal point and what does this value mean? b. What is the optimal consumption bundle i.e. (F*, C*)? c. Plot the budget line and clearly depict the point of optimality in the F (x-axis)-C (y-axis) space (draw both case budget lines and point of optimality on one diagram)
Q10. Consider a utility function: U (F,C) = FC so MU_F = C and MU_C = F. In Case 1, Total income is $100 , per unit prices of Food (F) are $2 , per unit prices of Cloth (C) are $10 In Case 2, Total income is $100 , per unit prices of Food (F) are $2 , per unit prices of Cloth (C) are $15 Find the following for both cases, and contrast Case 2 with Case 1: a. What is the value of MRS at the optimal point and what does this value mean? b. What is the optimal consumption bundle i.e. (F*, C*)? c. Plot the budget line and clearly depict the point of optimality in the F (x-axis)-C (y-axis) space (draw both case budget lines and point of optimality on one diagram)
Chapter4: Utility Maximization And Choice
Section: Chapter Questions
Problem 4.13P
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Q10. Consider a utility function: U (F,C) = FC so MU_F = C and MU_C = F.
In Case 1, Total income is $100 , per unit prices of Food (F) are $2 , per unit prices of Cloth (C) are $10
In Case 2, Total income is $100 , per unit prices of Food (F) are $2 , per unit prices of Cloth (C) are $15
Find the following for both cases, and contrast Case 2 with Case 1:
a. What is the value of MRS at the optimal point and what does this value mean?
b. What is the optimal consumption bundle i.e. (F*, C*)?
c. Plot the budget line and clearly depict the point of optimality in the F (x-axis)-C (y-axis) space (draw both case budget lines and point of optimality on one diagram)
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