ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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If people do not have a complete mental picture of total utility for every level of consumption ,how can they find their utility-maximizing consumption choice?
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- Suppose Carlos has to choose between purchasing jewelry and water. Which of the following is the utility-maximizing rule that Carlos should follow while choosing the optimal quantities of these two goods? (Note: In the answer options that follow, MU stands for "marginal utility.") O (MU of Water) x (Price of Water) = (MU of Jewelry) x (Price of Jewelry) O MU of Water = MU of Jewelry MU of Jewelry %3D Price of Water MU of Water Price of Jewelry MU of Jewelry Price of Jewelry MU of Water %3D Price of Water Since water costs little and jewelry is expensive, it must follow that when people choose their optimal quantities of water and jewelry to purchase, the marginal utility they receive from the last piece of jewelry they buy is than the marginal utility they receive from the last gallon of water they buy.arrow_forwardQUESTION 4 Linguini and Colette consume only éclair (x,) and profiterole (x2). Linguini has utility function UA = x4x4 and Colette has utility function UB = 2xfx. Linguini is endowed with 10 éclair (x,) and 3 profiterole (x), while Colette is endowed with 20 éclair (x,) and 9 profiterole (x2). (a) Draw an Edgeworth box with x, on the horizontal axis and x, on the vertical axis. Position Linguini on the bottom left corner and Colette on the top right comer. Indicate the total number of units of x, and x2. Label the endowment allocation. (b) Derive the equation of the contract curve, ie., find x(x). In your graph in (a), draw the contract curve.arrow_forwardSuppose Al is currently consuming five movies and two concerts per month. If his utility function is given by U = 15MC, where Mrepresents the number of movies seen and C represents the number of concerts attended, Al's total utility is equal to: 75 15 150 10 30arrow_forward
- Consider the figures to the right. Suppose that the individual currently consumes 5 digital apps. What happens to the person's total utility if they reduce their consumption to 4 units? Why does this fact imply that the marginal utility curve cuts through the horizontal axis of the lower figure between the fourth and fifth app consumed? Reducing consumption to 4 apps from 5 apps leaves total utility at utils in the upper , which is the figure. Hence, the marginal utility between these two quantities of apps equals value of the axis in the lower figure. Thus, the marginal utility curve crosses the axis of the lower figure between units 4 and 5. (Enter your responses as whole numbers.) Marginal Utility (utils per week) 6- 4- 22 Total Utility (utils + q r per week) 14- 12- 10- 20 ø Ø 18- 04 0 Downloaded Digital Apps Utilized per Week Downloaded Digital Apps Utilized per Week G Qarrow_forwardAnother instance when people are likely not to spend a dime (or a minute) on an item is when they have a dislike for mixing the item with other items available. In this case, we say the consumer has ‘non-convex preferences’ and indifference curves are bowed out from the origin. In plain language, the consumer has a preference for binging. We often feel this way towards our favorite social media app. Consider a kid who has four hours a day to spend on social media. They enjoy spending time on Snapchat (x) or spending time on Twitter (y). a) Write the kid’s time constraint and illustrate it in a graph where you measure time spent on Snapchat along the horizontal axis and time spent on Twitter along the vertical axis. This kid’s utility from time spent on Snapchat and time spent on Twitter is U(x,y) = 4x2+ y2. b) In your graph, draw a couple of the kid’s indifference curves. Notice how the kid’s |MRSY,X| increases along each curve as he spends more time on Snapchat and less time on…arrow_forwardWhich of the following statement is TRUE Group of answer choices As the consumption of a good increases, marginal utility rises, but total utility falls. As the consumption of a good increases, total utility falls and marginal utility falls. As the consumption of a good increases, total utility rises, but marginal utility falls.arrow_forward
- The marginal utility of good A is 4 utils, and its price is $ 2. The marginal utility of good B is 6 utils, and its price is $1. Is the individual consumer maximizing (total) utility if she spends a total of $3 by buying one unit of each good? If not, how can more utility be obtained? Explain using the Equimarginal principle.arrow_forwardHuang is determining how much Coke and Pepsi he will buy. Use the information in italics to answer the bolded question below. • Huang's preferences for Coke (C) and Pepsi (P) are represented by the following utility function: U = 2C + 3P • Huang has $12 to spend on soft drinks. • The price of Coke (P) is $0.50/can. • The price of Pepsi (Pp) is $1.00/can. Which of the following statements referring to Huang's preferences is incorrect. O Huang does NOT experience diminishing MRS. If Huang gives up two cans of Pepsi, he needs to purchase 3 cans of Coke to remain equally satisfied. Pepsi and Coke are perfect substitutes for Huang O None of the above statements are incorrect.arrow_forwardThe Law of Diminishing Marginal Utility is just a theory that has no application to everyday life. None of us behaves as if we were subject to this law. True or False? Explain.arrow_forward
- Mr. A derives utility from martinis (m) in proportion to the number he drinks: U(m) = m Mr. A is particular about his martinis, however: He only enjoys them made in the exact proportion of two parts gin (g) to one part vermouth (v). Hence we can rewrite Mr. A’s utility function as U(m) = U(g,v) = min (g/2, v). a. Graph Mr. A’s indifference curve in terms of g and v for various levels of utility. Show that, regardless of the prices of the two ingredients, Mr. A will never alter the way he mixes martinis. b. Calculate the demand functions for g and v. c. Using the results from part (b), what is Mr. A’s indirect utility function? d. Calculate Mr. A’s expenditure function; for each level of utility, show spending as a function of pg and pv. Hint: Because this problem involves a fixed-proportions utility function, you cannot solve for utility-maximizing decisions by using calculus.arrow_forwardYou like candy and cake. After using your entire $30 budget at the sugar store, you find that the marginal utility from the last candy you consumed was 60 and the last piece of cake was 30. Assuming you have maximized your utility and the price of a piece of candy is $4, calculate the price of cake? Do not enter dollar signs. Answer:arrow_forwardFang likes playing badminton with her friends. Her utility function for playing badminton every week is given by U(t) = 11t – 2t2, where t is measured in hours. They play on a badminton court, which they can rent per hour. Suppose the current price to play on the badminton court is £2.50 per hour. How many hours should Fang play if she wishes to maximise her utility? Explain what we mean by the principle of diminishing marginal utility. Does the principle apply in Fang’s case? Explain why. In a diagram with income in pound sterling on the horizontal axis and quantity on the vertical axis, show the relationship between Fang’s budget and the number of hours that would maximise her consumer surplus.arrow_forward
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