Answer each question in detail

PRACTICE EXERCISE - UTILITY # 1 I, A student asserts in class that the income and substitution effects lead to a decrease in the consumption of a normal good when the price decreases. Do you agree with the statement? Explain using an example. 2. Assume that a person only purchases two goods, food and clothing, and has a fixed budget constraint. Both goods are normal goods. If the price of food decreases, what will happen to the consumption of food and clothing based on the income effect? 3. A consumer finds only three products, X, Y, and Z, are for sale. The amount of utility which their consumption will yield are as shown in the table below. Assume that the prices of X, Y, and Z are $10, $2, and $8, respectively, and that the consumer has an income of $74 to spend. a. Complete the following table by computing the marginal utility per dollar for succes- sive units of X, Y, and Z to one or two decimal places. b. How many units of X, Y, and Z will the consumer buy when maximizing utility? Show this result using the utility maximization formula. C. Why would the consumer not be maximizing utility by purchasing 2 units of X, 4 units of Y, and 1 unit of Z? Product X Product Y Product Z Marginal Marginal Marginal utility utility utility Quantity Utility per $ Quantity Utility per $ Quantity Utility per $ 42 14 32 82 2 26 2 60 3 118 3 36 3 84 4 148 4 44 4 100 5' 170 5 50 5 110 6 182 6 54 6 116 182 56.4 120 4 . A consumer has an income of $24 to spend each day. The only two goods the consumer is interested in purchasing are goods A and B. The marginal-utility schedules for these two goods are shown in the table below. The price of B does not change and is $2. The marginal utility per dollar from B is also shown in the table. But the price of A varies as shown in the table. The marginal utility per dollar from A when the price of A is $8, $4, and $2 is shown in the table. Good A Good B Quantity MU MU/$8 MU/$4 MU/$2 MU MU/$2 48 6 12 24 24 12 32 16 15 8 24 12 12 6 auAWN 16 NNA DO 8 8 4 8 in Complete the table below to show how much of A the consumer will buy each week at each of the three possible prices of A. Also, show how much B will be demanded when the price of A changes Quantity of A Quantity of B Price of A demanded Price of B demanded $8.00 $2.00 A. M . HOROWITZ 4.00 2.00 2.00 2.00