Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Hermione wants to purchase some Gryffindor scarfs (S) and robes (R). The price of a scarf (Ps) is 1 golden Galleon (g), and the
Hermione wants to purchase some Gryffindor scarfs (S) and robes (R). The price of a scarf (Ps) is 1 golden Galleon (g), and the price of a robe (PR) is 2 g. She has an income (M) of 9 g. Her utility function is U(S, R)= S/3 R2/3 [Calculus Help: The derivative of U with respect to S is 3 = (), and the derivative of U with respect to R is = () .] au as a. [13 Points] How many scarfs and robes would she optimally choose to purchase? Let's call Hermione's budget line "LA", and her Optional Consumption Bundle (OCB) - Bundle "A". b. [13 Points] The price of robes suddenly falls to 1g, how many scarfs and robes can she actually buy? Let's call Hermione's new budget line "LB", and her new Optional Consumption Bundle (OCB) - Bundle "B". c. [3 Points] Given the new robe price, let's adjust Hermione's income so that she can exactly afford her old consumption bundle from Part (a), what would her adjusted income be? d. [10 Points] With the adjusted income you found in Part (c) and the new robe price, how many scarfs and robes would she purchase? Let's call Hermione's income-adjusted budget line "Lc", and her Optional Consumption Bundle under the adjusted income - Bundle "C". e. [21 Points] Please draw a graph with S on the x-axis, and R on the y-axis. In your graph, draw the three budget lines LA, LB, and Lc, you found in Parts (a), (b), and (d). Please label the numerical values of their intersections with both axises. Then, label precisely in your graph (showing their coordinates), the Optimal Consumption Bundles A, B, and C, which you calculated above. Please also use arrowed lines between OCBs to indicate the "income effect," the "substitution effect," and the "total effect." 29
Step by Step Solution
★★★★★
3.32 Rating (152 Votes )
There are 3 Steps involved in it
Step: 1
Question 1 Psg PR2g M 9g a where c 1 d 3 Good 2 Robes U ...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started