Question
Sonia is running for office and must allocate her volunteers' time between time phone banking (B) and canvasing (C). She currently has volunteers signed up
Sonia is running for office and must allocate her volunteers' time between time phone banking (B) and canvasing (C). She currently has volunteers signed up for six hours of phone banking and two hours of canvasing every day, and the volunteers are not willing to switch tasks from what they signed up for. Sonia's preferences over the two activities are given by the following: U S (B, C) = 5.4 B 2 C Assume B and C are easily divisible into fractions (don't worry if your answers aren't always integers). (a) Using monotonic transformations, show that Sonia's utility function can be rewritten in Cobb-Douglas form (i.e. U = BaC 1?a ) as U(B, C) = B 2 3 C 1 3 . You can solve the rest of this problem using either the original or Cobb-Douglas utility function, since they represent the same preferences, but it will be easier to solve in Cobb-Douglas form. (b) On a graph, draw Sonia's initial endowment. Make this graph large because we will use it again later on. Clearly label the axes. (c) On the same graph, draw the indifference curve through the endowment point for Sonia. It does not need to be to scale. Indicate in which direction on the graph utility is increasing. Name one other consumption bundle that lies on the same indifference curve. (d) What is Sonia's marginal rate of substitution between B and C at this initial endowment point? Now suppose Sonia meets up with other local candidates who are willing to trade their volunteers' time. Volunteers are still only willing to perform the task they signed up for, but she can trade as much of her volunteers' time as she likes. (e) Let the market price initially be that one hour of phone banking and one hour of canvasing can each be bought or sold for $10. What is Sonia's total effective budget in dollars? (f) Write an equation for the budget set and depict it on your graph from above. (g) Using the Lagrange method, solve for Sonia's optimal consumption bundle given the budget set. Show your derivations. Is she a net buyer or a net seller of canvasers? (h) Depict the optimal bundle on the graph from above. Draw the indifference curve this bundle lies on. (i) Suppose as the election draws closer, the price of canvasing increases to $15 per hour, but the price of phone banking remains at $10. Calculate Sonia's new budget set. (You do not need to graph this.) (j) Solve for Sonia's new optimal consumption bundle given the new prices. (k) Did the price change make Sonia better or worse off? How do you think this answer would be different if Sonia were a net seller of canvasers?
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