Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Im stuck at this qns. especially part b onwards 2. Lucetta consumes only two goods, A and B. Her only source of income is gifts

image text in transcribed

Im stuck at this qns. especially part b onwards

image text in transcribed
2. Lucetta consumes only two goods, A and B. Her only source of income is gifts of these commodities from her many admirers. She doesn't always get these goods in the proportions in which she wants to consume them, but she can always buy or sell A at the price pa - 1 and B at the price pr = 2. Lucetta's utility function is U(a, b) = ab, where a is the amount of A she consumes and b is the amount of B she consumes. (a) Suppose that Lucetta's admirers give her 100 units of 4 and 200 units of B. Draw her budget line. Label her initial endowment E. (b) What are Lucetta's gross demands for 4? And for B? (c) What are Lucetha's net demands? (d) Suppose that before Lucetta has made any trades, the price of good B falls to 1, and the price of good A stays at 1. Draw Lucetta's budget line at these prices on your graph. (e) Does Lucetta's consumption of good B rise or fall? By how much? What happens to Lucella's consumption of good ? (f) Suppose that before the price of good # fell, Lucetta had exchanged all of her gifts for money, planning to use the money to buy her consumption bundle later. How much of good B will she choose to consume? How much of good A? (g) Explain why her consumption is different depending on whether she was holding, poods or money at the time of the price change

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access with AI-Powered 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

Auditing Cases An Active Learning Approach

Authors: Mark S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt

2nd Edition

0130674842, 978-0130674845

Students also viewed these Economics questions