Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please provide an explanation for the question, thanks in advance. Assume Asmaa has Income = LE32llll, that she spends buying rice X and vegetables Y.

Please provide an explanation for the question, thanks in advance.

image text in transcribed
Assume Asmaa has Income = LE32llll, that she spends buying rice X and vegetables Y. She faces the prices PX = LEltIll per kilo and FY = LETtI per kilo. If our, 1') = 2X1\" + 41'1\". a) Set up Asmaa's utility maximization problem. b) Solve for Asmaa's demand functions for commodities X and Y; and calculate their Marshallian demand at the above given prices. c) Is her solution interior or corner? And why? d} Is the consumer's marginal rate of substitution (MRS) increasing, decreasing or constant? What does that tell us about the shape of the indifference curves? Interpret your answer. e) Show graphically Asmaa's budget set with its axes' intersection. Find relative price of rice in terms of vegetables. Give economic interpretation of the relative price. Where can the relative price be seen in the graph of a budget set? i] The government wants to minimize the consumption of vegetables. It imposes a tax of LEIO per one kilo of vegetables if consumption exceeds 5 kilos of vegetabies. Less than or equal to 5 kilos, the price of vegetables is the same at LEW. Plot graphically Asmaa's budget line without tax and with tax; and explain your answer with economic intuition. (Plot d and e on the same graph) g} What is the cross-price elasticity of demand of commodity X if price of Y increases by LEIO, given the same income level and same price of' X? interpret your answer. h) Find the change in consumption of good Y due to its price decrease to LESO. Then, decompose the total effect into the substitution and income effects. Show your steps and interpret results analytically and graphically. (Hint: Show at! changes on the same diagram. Indicate at what values they intersect the budget fines) i) Given the sign of the substitution and income effects, what is the type of commodity Y

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

Capital Theory And Political Economy Prices, Income Distribution And Stability

Authors: Lefteris Tsoulfidis

1st Edition

1351239414, 9781351239417

More Books

Students also viewed these Economics questions

Question

The feeling of boredom.

Answered: 1 week ago