ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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- Utility maximization with a budget constraint. A hypothetical consumer spends all tgheir income on ramen noodles (N) and wild rice (W). N is the quantity of noodles; W is the quantity of wild rice. Their income is $1,600 per month. the price of noodles is $2 per package and the price of wild rice is $20 per pound. The utility function is U=sqrt(N*W). the MRS = -N/W. The budget constraint is: 1,600 = 2*N + 20*W Graph Qty of noodles (N) on vertical axis and Qty of wild rice (W) on horizontal axis. SOLVE: a. Graph the budget constraint. label all points. What is the slope of the budget constraint? b. Find the optimal quantities of noodles(# of packages) and the wild rice (# of pounds) given the budget constraint. graph these optimal quantities. draw your indifference curve on the same graph. c. Show on your graph what happens when the price of wild rice increases to $40 per pound. Find your new optimal quantities of noodles and wild rice. label all points on graph. label the…arrow_forward4.13 CES indirect utility and expenditure functions In this problem, we will use a more standard form of the CES utility function to derive indirect utility and expenditure functions. Suppose utility is given by U(x, y) = (x° +y®)'/8 [in this function the elasticity of substitution o = 1/(1 – 6)]. a. Show that the indirect utility function for the utility function just given is V = I(p, + p,)¬/", where r = 8/(ò – 1) = 1 – 0. b. Show that the function derived in part (a) is homogeneous of degree zero in prices and income. c. Show that this function is strictly increasing in income. d. Show that this function is strictly decreasing in any price. e. Show that the expenditure function for this case of CES utility is given by E = V(p', + p,)''". f. Show that the function derived in part (e) is homogeneous of degree one in the goods' prices. g. Show that this expenditure function is increasing in each of the prices. h. Show that the function is concave in each price.arrow_forwardYou consume music (M) and concert tickets (C). Your utility function is U(M, C) = M1/4C3/4. The marginal utility for concert tickets, MUC is MUC =3/4C-1/2M1/4 and the marginal utility for music, MUM is MUm = 1/4C3/4M-3/4 (a) Calculate MRSMC using only the given marginal utilities. (b) Solve for the utility of bundle A where M = 16 and C = 16. Solve for your utility at bundle B where M = 128 and C = 8. Are the utilities the same? (c) Calculate MRSMC at bundle A and at bundle B. Are they the same? (d) Are your indifference curves convex? Draw the ICs. Make sure to label the quantities of the consumption bundles, the axis, and the MRS at those bundles.arrow_forward
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