a)
To find: The utility function in term of 0.75 liter containers and 2 liter containers.
a)
Explanation of Solution
If both goods are substitute goods, the utility function will be in the following form:
Therfore, from the question, the value of Alpha will be 0.75 and the value of Beta will be 2.
Thus, the utility function is:
U = 0.75x + 2y
b)
To find: Person E’s
b)
Explanation of Solution
In the case of substitute goods, consumer will spend all income on x if ratio of prices Px/Py is less than the
Thus, demand function is:
c)
To find: Demand curve for good x.
c)
Explanation of Solution
Demand curve is represented by red line.
d)
To find: Reason to the shift in demand curve for x.
d)
Explanation of Solution
In the diagram, it can be seen that demand curve have two potion that is touched with x axis and other is overlapped on vertical axis. So, the portion that is touched with x axis will shift the curve rightwards.
e)
To find: The compensated demand curve.
e)
Explanation of Solution
The compensated demand curve occurs in the case of substitution effect and not in the case of income effect. Moreover, in the following case, the substitution effect exists so the shape of demand curve will be same as the demand curve of part “d”.
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Chapter 5 Solutions
Microeconomic Theory
- Jeremy is deeply in love with Jasmine. Jasmine lives where cell phone coverage is poor, so he can either call her on the land-line phone for five cents per minute or he can drive to see her, at a round—trip cost of 2 in gasoline money. He has a total of 10 per week to spend on staying in touch. To make his preferred choice, Jeremy uses a handy utilimometer that measures his total utility from personal visits and from phone minutes. Using the values in Table 6.6, figure out the points 011 Jeremys consumption choice budget constraint (it may be helpful to do a sketch) and identify his utility-maximizing point.arrow_forwardPraxilla, who lived in ancient Greece, derives utility from reading poems and from eating cucumbers. Praxilla gets 30 units of marginal utility from her first poem 27 units of marginal utility from her second poem 24 units of marginal utility from her third poem, and so on, with marginal utility declining by three units for each additional poem. Praxilla gets six units of marginal utility for each of her next three cucumbers consumed, five units of marginal utility for each of her next three cucumbers consumed, four units of marginal utility for each of the following three cucumbers consumed, and so on, with marginal utility declining by one for every three cucumber consumed. A poem costs three bronze coins hut a cucumber costs only one bronze coin. Praxilla has 18 bronze coins. Sketch Praxillas budget set between poems and cucumbers, placing poems on the vertical axis and cucumbers on the horizontal axis. Start off with the choice of zero poems and 18 cucumbers, and calculate the changes in marginal utility of moving along the budget line to the next choice of one poem and 15 cucumbers. Using this step-by-step process based on marginal utility, create a table and identify Praxillas utility—maximizing choice. Compare the marginal utility of the two goods and the relative prices at the optimal choice to see if the expected relationship holds. Hint: Label the table columns: 1) Choice, 2} Marginal Gain from More Poems, 3) Marginal Loss from Fewer Cucumbers, 4) Overall Gain or Loss, 5) Is the previous choice Optimal? Label the table rows: 1) 0 Poems and 18 Cucumbers, 2) 1 Poem and 15 cucumbers, 3) 2 Poems and 12 cucumbers, 4) 3 Poems and 9 Cucumbers, 5) 4 Poems and 6 cucumbers 6) 5 Poems and 3 Cucumbers, 7) 6 Poems and 0 Cucumbers.arrow_forwardTake Jeremys total utility information in Exercise 6.1, and use the marginal utility approach to confirm the choice of phone minutes and round trips that maximize Jeremys utility.arrow_forward
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