Consider Arturo, an individual with utility for a composite good ((X)) and indoor air quality ((Q): U=X
Question:
Consider Arturo, an individual with utility for a composite good \((X)\) and indoor air quality \((Q): U=X Q\). Indoor air quality depends on pollution levels outside \((P)\) and defensive expenditures \((D): D=P Q^{2}\). Let Arturo's income be \(Y\).
a. Write Arturo's problem of utility maximization subject to a budget constraint, mathematically. Draw Arturo's budget constraint and several indifference curves.
b. Suppose \(Y=10\) and \(P=1\). What are the optimal amounts of \(X\) and \(Q\) for Arturo?
c. What happens to the optimal \(X\) and \(Q\) (show your work) when
(i) \(P\) increases to 2
(ii) \(Y\) increases to 20 ?
d. It is observed that low income individuals are exposed to more pollution. Is your answer to part (c) consistent with this?
Step by Step Answer: