Answer the following short questions: a. Suppose that a consumer’s preferences between goods x and y are represented by the utility function u(x, y) = x^2 + 16xy + 64y^2. If these two goods have the same price, describe the optimal consumption choice of this consumer. b. Suppose that when the price of a good change, the income and substitution effects change the consumer’s demand for that good in opposite directions. i. Is this good a normal or an inferior good? Explain. ii. Is this good a Giffen or an ordinary good? Explain. c. Is the following statement true or false? The difference between a monopolist’s marginal cost and its profit-maximizing price is smaller when the demand is more elastic.
Answer the following short questions:
a. Suppose that a consumer’s preferences between goods x and
y are represented by the utility function u(x, y) = x^2 + 16xy + 64y^2. If these two goods have the same price, describe the optimal consumption
choice of this consumer.
b. Suppose that when the price of a good change, the income
and substitution effects change the consumer’s demand for that good
in opposite directions.
i. Is this good a normal or an inferior good? Explain.
ii. Is this good a Giffen or an ordinary good? Explain.
c. Is the following statement true or false? The difference
between a monopolist’s marginal cost and its profit-maximizing price is
smaller when the demand is more elastic.
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