Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Utility Maximization with Substitutes Carol needs to decide how to spend her wealth on fish and chicken. For Carol, 1 lb of fish is equivalent

Utility Maximization with Substitutes Carol needs to decide how to spend her wealth on fish and chicken. For Carol, 1 lb of fish is equivalent to 2 lb of chicken. Her preferences can be represented by the utility function u(x, y) = 2x +y

where x is the quantity of fish (in lbs) and y is the quantity of chicken (in lbs). The consumption set is R 2 +. (a) Draw two typical indifference curves for Carol, one corresponding to a utility level of u1 and one corresponding to a utility level u2, where 0 < u1 < u2. Make sure you label the slope of the indifference curves and the intercepts with the horizontal and vertical axes. (b) Suppose the price of fish is $1.5 per lb and the price of chicken is $1 per lb. Carol has $20 to spend on fish and chicken. (i) Draw Carol’s budget set, labeling the slope and the intercept points clearly. (ii) How much fish and chicken will Carol choose to purchase? (c) Suppose now that the price of fish increases to $2 per pound. (i) Draw Carol’s budget set, labeling the slope and the intercept points clearly. (ii) How much fish and chicken will Carol choose to purchase? (d) Suppose that Carol goes to a different supermarket where the price of fish is pX > 0 (in dollars per pound of fish) and the price of chicken is pY > 0 (in dollars per pound of chicken). (i) Find Carol’s demand for fish as a function of the prices pX and pY . You can assume that she still has $20 to spend. (ii) Assume that the price of chicken is pY = 1. Draw Carol’s demand function for fish as a function of the price of fish (pX) in a diagram with the quantity of fish on the vertical axis and the price of fish on the horizontal ax

Step by Step Solution

3.24 Rating (145 Votes )

There are 3 Steps involved in it

Step: 1

Utility Maximization for Carol Part a Indifference Curves Carols utility function is ux y 2x y Heres ... 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

Intermediate Microeconomics

Authors: Hal R. Varian

9th edition

978-0393123975, 393123979, 393123960, 978-0393919677, 393919676, 978-0393123968

More Books

Students also viewed these Economics questions

Question

To what does the normal balance of an account refer?

Answered: 1 week ago

Question

Distinguish between prejudice and discrimination.

Answered: 1 week ago