Microeconomics
2nd Edition
ISBN: 9780073375854
Author: B. Douglas Bernheim, Michael Whinston
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Question
Chapter 5, Problem 4DQ
To determine
Explain the best choice of Person O.
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Suppose that your family has just decided to adopt a cat named Hailey. You have a monthly budget of $40 that you can choose to spend on either cat
food or other consumption goods. Assume the price of a can of cat food is $5 for the first 2 cans, but then it drops to only $3 per can for each
additional can. All other consumption goods will be treated as a composite good, so you can think of this as simply the cash left over to spend on other
items after buying cat food.
On the following graph, use the green points (triangle symbol) to graph your family's budget constraint.
Note: Plot your points in the order in which you would like them connected. Line segments will connect the points automatically.
OTHER CONSUMPTION (Amount per month)
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Budget Constraint
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Clarke County High School has $60,000 to spend on computers and other goods so its budget equation is C + X = 60,000, there C is expenditure on computers and X is expenditure on other things. The high school’s preferences can be represented by the utility function ?(?, ?) = ??2, where the marginal rate of substitution is −?/2?. Currently, the high school’s optimal bundle is $20,000 of computers, and $40,000 of everything else.a. Graphically show the school’s budget line, with computers on the x-axis and all other goods on the y-axis. Label intercepts and the current optimal bundle and sketch an indifference curve.b. The State Education Commission wants to encourage “computer literacy” in schools, and so has proposed the following plan: Give a grant of $20,000 to each school in the state, which the school can use only for computers. If the state adopts the plan, add the school’s new budget constraint to the graph above, making sure to label the line and the appropriate intercepts. What…
Maya is doing her undergrad at Queen's University. She loves donuts and chocolate chip cookies (CCC).
Her utility function is given by u(x, y) = √8x +5 + 2y, where x denotes her consumption of donuts and y denotes her consumption of
CCC. Her budget is $10/day. The price of a donut is $1.
(a) When the price of CCC is $1, what is Maya's optimal choice of donuts and CCC?
(b) When the price of CCC is $8, what is Maya's optimal choice of donuts and CCC?
(c) When the price of CCC increases from $1 to $8, calculate Maya's substitution effect and income effect.
(d) According to your calculation in part (c), is CCC a normal good or an inferior good? Explain. Is CCC an ordinary good or a Giffen good?
Explain.
Chapter 5 Solutions
Microeconomics
Ch. 5 - Prob. 1DQCh. 5 - Prob. 2DQCh. 5 - Prob. 3DQCh. 5 - Prob. 4DQCh. 5 - Prob. 1PCh. 5 - Prob. 2PCh. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - Prob. 5PCh. 5 - Prob. 6P
Ch. 5 - Prob. 7PCh. 5 - Prob. 8PCh. 5 - Prob. 9PCh. 5 - Prob. 10PCh. 5 - Prob. 11PCh. 5 - Prob. 12PCh. 5 - Prob. 13PCh. 5 - Prob. 14PCh. 5 - Prob. 15PCh. 5 - Prob. 16PCh. 5 - Prob. 1CPCh. 5 - Prob. 2CPCh. 5 - Prob. 3CPCh. 5 - Prob. 4CPCh. 5 - Prob. 5CPCh. 5 - Prob. 6CPCh. 5 - Prob. 7CPCh. 5 - Prob. 8CP
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- Suppose a student has monthly income of Rs 10,000. He consumes only two commodities Sandwich and Shawarma. The cost of Sandwich is Rs 50 each, and the cost of Shawarma is Rs 100 each. a) Draw the student's budget constraint. What is the slope of his budget constraint? b) Suppose student gets a raise, so his income increases from Rs 10,000 to Rs 12,000. Show what happens to consumer optimal consumption choice if both Sandwich and Shawarma are normal goods. Now show what happens if Sandwich is an inferior good. c) Suppose consumer income decreases to Rs. 8,000. Show what happens if both Shawarma and Sandwich are normal goods. Now show what happens if Sandwich is an inferior good.arrow_forwardSummer break is approaching! Suppose you derive utility from days spent traveling on vacation domestically, D, and days spent traveling on vacation in a foreign country, F. Your utility function over these two “goods” is: U(D, F) : 4D0.25F 0.75 Let your budget constraint be I(D, F) = pDD + pF F; where I is your income, pD is the price of domestic travel per day, and pF is the price of foreign travel per day. a. Determine the demand functions for domestic travel and foreign travel. Make sure you show your work – show the steps used. b. Suppose that you’ve saved $800 for your summer travel, the price of domestic travel per day is $25 and the price of foreign travel per day is $100. How many days of each type of travel will you embark on? c. Illustrate the indifference curve, budget constraint, and the utility maximizing bundle associated with (b). Make sure you show the level of utility, the budget constraint intercepts, and the optimizing equilibrium.arrow_forwardA consumer has set a budget of $400 for the consumption of good X and Y. The price of Good X is S"Px", and the price of good Y is S5. The consumer has a Utility function given by U(X,Y) = ху Find the optimal consumption choice of the individual and the utility obtained in terms of Px. Make a graph that illustrates the solution to the problem. Why do we use parameters?arrow_forward
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