Felix chooses between clothing, 9₁, and food, 9₂. His initial income is $4,000 a month, p₁ = 400, and p2 = 40. At his initial bundle, he consumes q₁ = 2 and q₂ = 80. Later, his income rises to $4,800 and the price of clothing rises to p₁ = $600, but the price of food does not change (p₂ = 40). As a result, he reduces his consumption of clothing to q₁ =1. Using a revealed preference reasoning (that is, knowing nothing about his indifference curves), can you determine how he ranks the two bundles? O A. Felix may prefer his initial bundle or he may be indifferent between them. O B. Felix is indifferent between his initial bundle and his new bundle. O C. Felix prefers his new bundle. O D. Felix prefers his initial bundle. O E. Insufficient information exists to determine which bundle Felix prefers.

Felix chooses between clothing, 9₁, and food, 9₂. His initial income is $4,000 a month, p₁ = 400, and p2 = 40. At his initial bundle, he consumes q₁ = 2 and q₂ = 80. Later, his income rises to $4,800 and the price of clothing rises to p₁ = $600, but the price of food does not change (p₂ = 40). As a result, he reduces his consumption of clothing to q₁ =1. Using a revealed preference reasoning (that is, knowing nothing about his indifference curves), can you determine how he ranks the two bundles? O A. Felix may prefer his initial bundle or he may be indifferent between them. O B. Felix is indifferent between his initial bundle and his new bundle. O C. Felix prefers his new bundle. O D. Felix prefers his initial bundle. O E. Insufficient information exists to determine which bundle Felix prefers.

Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter20: Consumer Choice And Elasticity

Section: Chapter Questions

Problem 4CQ

See similar textbooks

Similar questions

Brian spends his entire monthly income of $1200 on shoes (S) and pizzas (P). The price of a pair of shoes is $60, and the price of a pizza is $20. If he consumes 10 pairs of shoes and 30 pizzas, his MRS is 2P/1S. (A quantity of shoes is measured along the x-axis, and a quantity of pizza is measured along the y-axis.) His choice is optimal. True False
Eren’s two main hobbies are taking vacations overseas (V) and eating expensivemeals (M). His utility function is given as: U(V,M) = V2MLast year, the average price of taking a vacation overseas was US$200 and the averageprice of an expensive meal is $50. However, due to supply problems in Onions, theaverage price of an expensive meal rose to $75. The average price of a vacation did notchange. His income, which is $1500, did not change. Suppose that the Department of Welfare wants to know how much should begiven to Eren to offset his change un utility due to the price increase of an expensivemeal. Calculate the compensative variation (CV).
Eren’s two main hobbies are taking vacations overseas (V) and eating expensivemeals (M). His utility function is given as: U(V,M) = V2MLast year, the average price of taking a vacation overseas was US$200 and the averageprice of an expensive meal is $50. However, due to supply problems in Onions, theaverage price of an expensive meal rose to $75. The average price of a vacation did notchange. His income, which is $1500, did not change. Calculate for the equivalent variation (EV) for the price change.
Eren’s two main hobbies are taking vacations overseas (V) and eating expensivemeals (M). His utility function is given as: U(V,M) = V2MLast year, the average price of taking a vacation overseas was US$200 and the averageprice of an expensive meal is $50. However, due to supply problems in Onions, theaverage price of an expensive meal rose to $75. The average price of a vacation did notchange. His income, which is $1500, did not change. Calculate the change in consumer surplus from consuming the expensivemeals considering the price change (Hint: you need to compare his optimalconsumption bundle before and after the price change to get the change in CS).
Peter consumes only chocolate ice cream and vanilla ice cream. He is spending all of his income. His marginal utility of chocolate is 200 and his marginal utility of vanilla is 200, and the price of chocolate is $1.00 per scoop and the price of vanilla is $2.00 per scoop. To maximize his utility, Peter should
Ray buys only hamburgers and bottles of root beer out of a weekly income of $100. He currently consumes 20 bottles of root beer per week, and his marginal utility of root beer is 6. The price of root beer is $2 per bottle. Currently, he also consumes 15 hamburgers per week, and his marginal utility of a hamburger is 8. Is Ray maximizing utility at his current consumption basket? If not, should he buy more hamburgers each week, or fewer?
Question 6 A consumer spends all of her income on two goods, coffee and doughnuts. She buys coffee at 25 cents per unit with a total utility of 800 and a marginal utility of 12. Doughnuts are purchased at 75 cents a unit with a total utility of 200 and a marginal utility of 24. To increase her total utility, the consumer should: Buy more coffee and less doughnuts Buy more of both goods Do nothing. She is currently maximizing utility with her limited budget. Buy less of both goods Buy more doughnuts and less coffee.
Brenda wants to buy new car and has a budget of $25,000. She has just found a magazine that assigns each car an index for styling and an index for gas mileage. Each index runs from 1 to 10, with 10 representing either the most styling or best gas mileage. While looking at the list of cars, Brenda observes that on average, as the style index increases by one unit, the price of the car increases by $6,250. She also observed that as the gas-mileage index rises by one unit, the price of the car increases by $5,000. Illustrate the various combinations of style (S) and gas mileage (G) that Brenda could select with her $25,000 budget. Using the line drawing tool, illustrate Brenda's budget line. Label this line 'Budget Line'. Carefully follow the instructions above, and only draw the required object. Suppose Brenda's preferences are such that she always receives two times as much satisfaction from an extra unit of styling as she does from gas mileage. What type of car will Brenda choose?…
A consumer buys Bread (B) and Milk (M) each week at prices of Rs. 10 and Rs. 8 respectively. Suppose that the consumer's current consumption of Bread and Milk is giving him MUBrend = 80 and MUMia = 70. Is the consumer buying the utility-maximizing combination of bread and milk? If not, how should he reallocate his expenditures between the two goods to maximize utility? Draw diagram and explain.
Aria consumes only two goods, food and clothing. The marginal utility of the last dollar she spends on food is 12, and the marginal utility of the last dollar she spends on clothing is 9. The price of food is $1.20/unit, and the price of clothing is $0.90/unit. Is Aria maximizing her utility?
Questions 1. Will's utility from vacations (91) and meals (92) is given by the function U(V, M) = 91 x 92. Last year, the price of vacations was $200 and the price of meals was $50. This year, the price of meals rose to $75, while the price of vacations remained the same. Both years, Will had an income of $1500. (a) What is the compensating variation for the price change in meals? (b) What is the equivalent variation for the price change in meals?
Juice e2 e₁ 15 18 25 B2 Soda 37) The above figure shows Bobby's indifference map for soda and juice. B₁ indicates his original budget line. B₂ indicates his budget line resulting from an increase in the price of soda. From the graph, one can conclude that A) the income elasticity of demand for soda is 1. B) Bobby's demand for soda is perfectly inelastic. C) Bobby views soda as a normal good. D) Bobby views soda as an inferior good.