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- Apply marginal utility theory to the paradox of valueSuppose a consumer has preferences between two goods that are perfect substitutes. Can you change prices in such a way that the entire demand response is due to the income effect?The price of goods A and B are 20 and 10 respectively. given that the marginal utility of commodity A is 10. what is the marginal utility of B if the consumer is at equilibrium.
- Discuss how the utility-maximization model helps highlight the income and substitution effects of a price change.Two students, Nick and Sofia, are discussing normal and inferior goods. Nick says that if Frodo buys more beer when the price of beer goes up, then beer must be an inferior good for Frodo. If, on the other hand, he buys less beer when the price of beer goes up, then beer must be a normal good for Frodo. Sofia disagrees: "Normal and inferior goods are about income changes, not price changes. Therefore, we do not have enough information: beer could be an inferior or normal good in either of these cases." Do you agree or disagree? Carefully explain your point of view. Support your argument with graphs of income, substitution and total effects (please put beer on the horizontal axis and the other goods on the vertical axis). Please assume that Frodo's preferences over beer and other goods are strictly convex and satisfy "more is better" assumption.If a consumer is rational and maximizing utility, their Marginal Rate of Substitution will be equal to the price ratio. Why is this?
- When the price of chicken unexpectedly rises, many consumers choose to purchase corned beef instead.The concept of diminishing marginal utility says that the satisfaction level of human beings drop as we get more of something. Because of this, we place less value in the good or service and human beings will then demand lower prices for additional units. True or FalseThe law of diminishing marginal utility is consistent with the fact that people trade. Do you agree or disagree? Explain your answer.