Economics (Irwin Economics)
21st Edition
ISBN: 9781259723223
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Chapter 7.A, Problem 3ADQ
To determine
The consumer equilibrium position.
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Mr. Dogan has 4000 TL to spend. He considers buying meat whose price is 400 TL per kg. and cheese whose price is 160 TL /kg. Given this a) What condition (equality) leads him to a utility maximization. State the condition numerically and tell clearly what each of the variables mean in that equation b) Now suppose that income of Mr. Dogan and price of meat does not change but price of cheese is down to 130 TL/kg. Do the equality and optimal basket found in a still maximize the utility? If not; what is the new condition for utility maximization (write the condition as a numerical equation defining the variables in the equation)
Refer to figure 6.1. Assume that L1 represents the budget line before a price change. Point C represents the:
A) uncompensated effect on an increase in the price of soup
B) compensated effect on a decrease in the price of soup
C) uncompensated effect on a decrease in the price of soup
D) compensated effect on an increase in the price of soup
Suppose a consumer has preferences represented by the utility function U(X,Y) = X2Y Suppose PY = 1, and the consumer has $300 to spend. Draw the Price-Consumption Curve for this consumer for income values PX = 1, PX = 2, and PX = 5. Your graph should accurately draw the budget constraints for each income level and specifically label the bundles that the consumer chooses for each income level. Also, for each bundle that the consumer chooses, draw the indifference curve that goes through that bundle. Make sure to label your graph carefully and accurately.
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Chapter 7 Solutions
Economics (Irwin Economics)
Ch. 7.1 - Prob. 1QQCh. 7.1 - Prob. 2QQCh. 7.1 - Prob. 3QQCh. 7.1 - Prob. 4QQCh. 7.A - Prob. 1ADQCh. 7.A - Prob. 2ADQCh. 7.A - Prob. 3ADQCh. 7.A - Prob. 1ARQCh. 7.A - Prob. 2ARQCh. 7.A - Prob. 1AP
Ch. 7.A - Prob. 2APCh. 7.A - Prob. 3APCh. 7 - Prob. 1DQCh. 7 - Prob. 2DQCh. 7 - Prob. 3DQCh. 7 - Prob. 4DQCh. 7 - Prob. 5DQCh. 7 - Prob. 6DQCh. 7 - Prob. 7DQCh. 7 - Prob. 8DQCh. 7 - Prob. 9DQCh. 7 - Prob. 10DQCh. 7 - Prob. 1RQCh. 7 - Prob. 2RQCh. 7 - Prob. 3RQCh. 7 - Prob. 4RQCh. 7 - Prob. 5RQCh. 7 - Prob. 1PCh. 7 - Prob. 2PCh. 7 - Prob. 3PCh. 7 - Prob. 4PCh. 7 - Prob. 5PCh. 7 - Prob. 6PCh. 7 - Prob. 7P
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- Refer to the indifference curve/budget line diagram below in Figure 7. Given that a consumer initially faces budget line (BL1) and ICI, and thus, by choosing consumption point c, is able to achieve the optimal utility level. If the price of x (Px) decreases, then the substitution effect (SE) is the movement from _-. effect (IE) is the movement from and the income y a IC2 d IC: BLI Figure 7 O a. from b to a; and a to d. O b. from a to b; and b to c. O c. No correct answwers. O d. from c to d; and d to a.arrow_forwardTo determine the utility maximizing consumption of two products one uses the formula that is called the rule for maximizing utility: OP1/P2-MU1/MU2 which also is stated as MU1/PU1-MU2/P2.. OExplains the Diamond-Water Paradox. O Calculates the utility maximizing consumption of the two goods. All of the above are correct. None of the above are correct.arrow_forwardThe table shows the marginal utility schedules for product X and product Y for a hypothetical consumer. The price of product X is $6 and the price of product Y is $2. The income of the consumer is $30. MU x MUy Units of X Units of Y 72 1 24 66 20 3 60 3 16 4 48 4 12 30 When the consumer purchases the utility-maximizing combination of product X and product Y, total utility will be. O76 O 356 96 156 306 86 2. 2.arrow_forward
- Connie has a monthly income of $20.00 that she allocates among two goods: meat (M) and potatoes (P). Suppose meat costs $5.00 per pound and potatoes $2.00 per pound. Connie's budget line (L₁) is drawn in the figure to the right. Suppose also that her utility function is given by the equation U(M,P) = 2M + P. What combination of meat and potatoes should she buy to maximize her utility? pounds of To maximize utility, Connie should buy pounds of meat and potatoes. (Enter your responses rounded to two decimal places.) Meat 8- 7- 6- 5- 3- L₁ 2- 1- U₁ U₂ U3 e 10 11 12 13 14 15 16 Potatoes When using the multipoint curve drawing tool, hit the key to end your line.arrow_forwardRiley has $6 to spend on ramen and apps for their phone. The price of a bowl of ramen is $2, and the price of an app is $1. Riley's preferences for ramen and apps are represented by the indifference curves on the next page. a. Determine which line (L1, L2, L3, L4, or L5) represents Riley's budget constraint. b. Find the utility-maximizing bundle for Riley (E1, E2, E3, E4, or E5). Determine how many bowls of ramen Riley will buy. Suppose now that the price of a bowl of ramen is discounted for students to $1 per bowl. c. Determine which line (L1, L2, L3, L4, or L5) represents Riley's new budget constraint. d. Find the new utility-maximizing bundle for Riley (E1, E2, E3, E4, or E5). Determine how many bowls of Ramen Riley will now buy. e. Find the size and direction (positive or negative) of the substitution effect. As part of your answer, state the starting quantity and ending quantity of bowls of ramen that represent this effect. f. Find the size and direction (positive or negative) of…arrow_forwardSuppose Jane spends $48 each month on Oreo cookies with a price of $2 per package, and salt and vinegar chips with a price of $3 per bag. a) With chips on the horizontal axis, draw Jane budget constraint, making sure to indicate the horizontal and vertical intercepts. b) Suppose that at current prices, Jane purchases 6 bags of chips each month. Draw an indifference curve tangent to Jane budget constraint consistent with this choice (assume Jane is maximizing her utility). Label her chosen bundle with the letter A. How many packages of Oreos does Jane buy? c) Suppose that the price of chips falls to $2 per bag, and Jane increases her chip consumption to 8 bags each month. Draw Jane’s new budget constraint and indicate her chosen bundle with an appropriately drawn indifference curve. Label her utility-maximizing bundle with the letter B. (Be sure to determine the right quantities of both chips and Oreos!) d) A major chip producer has experienced a fire, and the disruption of supply has…arrow_forward
- We are told that Alfonso is a rational consumer, but we do not have much information about his preferences for Olives (good 1) and pickled onions (good 2). Suppose we observe that when the prices p1=p2=1 and his income is M=2, he chooses the bundle (1,1). Now we suppose we are told that p1 has decreased, that p2 has remained the same, and that Alfonso's income has been modified so that his initially chose bundle (1,1) is just affordable. Show that at his chosen bundle Alfonso consumes more Olives.arrow_forward12 There are two goods and John's preferences can be represented by u: R²0 R given by u(x) = x₁³x2³. His income and price of the two goods are given by (M, P1, 20 P2) = (12, 1, 2). Which 2 of the following 8 options are false: In John's optimal bundle, he consumes the same amount of good 1 as good 2. If we change John's utility function to u(x) = x + then John's optimal bundle remains unchanged. At John's optimal bundle, the slope of the budget constraint equals the slope of the indifference curve. In John's optimal bundle, he spends the same amount on good 1 as good 2. John's preferences satisfy local non-satiation. At John's optimal bundle, his bang per buck of good 1 equals his bang per buck of good If we change John's utility function to u(x) = In (17 +x₁x₂) then John's optimal bundle remains unchanged. If we change the budget set to (M, P1, P2) = (24, 2, 4) then John's optimal bundle remains unchanged.arrow_forward4. You are given the following information about consumer's optimal consumption choices for different prices and income combinations: P1(£) P2 (£) м (€) Optimal bundle (x1, x2) 4 4 100 15 10 2 4 100 25 12.5 4 68 20 7 4 4 80 12 8 4 2 80 10 20 You know that bundle (15, 10) and bundle (20, 7) are on the same indifference curve. Suppose that at first, the consumer faces the following budget constraint: 4x, + 4x2 = 100. Then, the price of good 1 falls to 2. The following can be said: a) Due to the substitution effect of a reduction in p, the consumer buys 5 more units of x1 and 3 units less of x2. b) The price effect of p, causes an increase in the consumption of 10 units of x1. c) The compensating variation in income is a reduction of £32. d) The income effect adds only 5 units of x1. e) All of the above. f) None of the above.arrow_forward
- Molly loves hamburgers and soft drinks, but insists on consuming exactly one soft drink for every two hamburgers that she eats. 20- о 18- 1.) Using the multipoint curve drawing tool, graph an indifference curve that is consistent with Molly's preferences. Include the bundle with four soft drinks and eight hamburgers. Label this curve U, 16- 14 2) Using the multipoint curve drawing tool, graph another indifference curve showing a higher level of utility for Molly. Include the bundle with six soft drinks and twelve hamburgers. Label this curve "U, 12- 10- 8- Carefully follow the instructions above, and only draw the required objects. 6- 4- 2- 10 12 1416 18 20 Soft Drinks When using the multipoint curve tool, hit the key to end your line. Hamburgersarrow_forwardQuestion 1 1.1 Explain the principle of a diminishing marginal rate of substitution within the context of consumer preferences and explain the relationship between this principle and the axiom of strictly convex preferences. 1.2 Explain the difference between the ordinal and cardinal approach to utility. Also explain why the ordinal approach will always allow for multiple real-valued utility functions rep- resenting the same underlying (strictly monotonic) preference relations (in other words, explain why using the ordinal approach leads to non-unique utility functions).arrow_forwardPaolo enjoys consuming both soda and coffee. Each can of soda costs Ps = $1, and each cup of coffee costs Pc = $2. Suppose that Paolo buys 75 cans of soda and 50 cups of coffee per month. The following graphs show his marginal utility curves for soda and coffee. At his current consumption level, Paolo's marginal utility from consuming the last can of soda he bought is MUS = 12 utils per can, and his marginal utility from consuming the last cup of coffee he bought is MUC = 12 utils per cup. 24 20 20 16 25 50 75 100 125 150 25 50 75 100 125 150 SODA (Cans) COFFEE (Cups) Is Paolo currently maximizing his utility? O No; he likes coffee and soda more than other goods, so he should buy more of both. O No; he could buy less soda and more coffee, not spend any more money, and be better off. O Yes; the marginal utility he receives from his last can of soda equals that of his last cup of coffee. O No; he could buy more soda and less coffee, not spend any more money, and be better off. MU OF SODA…arrow_forward
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