Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A consumer has income of 3000. Bread is priced at 3 a loaf and potatoes priced at 6 a kilo. a. Draw the consumer's budget

A consumer has income of 3000. Bread is priced at 3 a loaf and potatoes priced at 6 a kilo.

a. Draw the consumer's budget constraint. What is the slope of this budget constraint?

b. Draw a consumer's indifference curves for bread and potatoes. Pick a point on an indifference curve for bread and potatoes and show the marginal rate of substitution. What does the MRS tell us?

c. Show the optimal consumption choice. What is the MRS at this optimum?

d. The price of potatoes rises from 6 to 10 a kilo, while the price of bread remains at 3 a loaf. For a consumer with a constant income of 3000, show what happens to consumption of bread and potatoes. Decompose the change into income and substitution effects.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Essentials Of Accounting

Authors: Robert N Anthony, Leslie K Breitner

10th Edition

136071821, 9780136071822

More Books

Students also viewed these Economics questions

Question

Find d dx [tanh (sin .x)].

Answered: 1 week ago