Hi, I have a few questions for which answers are already provided. However I would like to
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Hi, I have a few questions for which answers are already provided. However I would like to understand how the answer was derived, could you help me understand the step by step process for the following questions?
Thank you in advance!
- Goods 1 and 2 are perfect complements, and a consumer always consumes them in the ratio of 2 units of good 2 per unit of good 1. If a consumer has an income of $300 and if the price of good 2 changes from $5 to $6, while the price of good 1 stays at $1, then the income effect of the price change: (Answer = accounts for the entire change in demand).
- If Bernice (whose utility function is min{x, y}, where x is her consumption of earrings and y is money left for other stuff) had an income of $13 and was paying a price of $2 for earrings when the price of earrings went up to $3, then the equivalent variation of the price change was (Answer: $3.25).
- For this exercise, you are required to choose one of the following options in the brackets. Give your reasoning. If the exponents in the production function were 0.80 for x1 and 0.20 for x2, this production function would exhibit (constant, increasing, decreasing) returns to scale and (would/would not) have diminishing technical rate of substitution. (Answer: constant, would).
- Recall that Touchie McFeelie's production function for comic books is 0.1J1/2 L3/4. Suppose that Touchie can vary both jokes and cartoonists' labor. If old jokes cost $4 each and cartoonists' labor costs $24 per hour, then the cheapest way to produce comics books requires using jokes and labor in the ratio. (Answer = J/L=4)
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