1. Business
  2. Economics
  3. a consumers preferences over r and y are given by...

Question: a consumers preferences over r and y are given by...

Question details

A consumers preferences over r and y are given by the utility function u(x, ) 2vVr + 2/j. The individuals income isI $100. The price of a unit of good r is $2, while the price of a unit of good y is $1. (a) Graphically describe i. the consumers preferences for r and y (b) Find the optimal r that the consumer would choose. You may assume (c) What is the consumers MRS at (, y) (10, 80)? Interpret. Why is this (d) Suppose that the consumers income increases by $50. ii. the budget constraint an interior solution and that preferences are convex (which they are) not an optimal choice of r and y? i. Graphically describe the effect of this increase in the budget con- straint. ii. Calculate the optimal level of r. What level of utility does the con- sumer reach with the new level of income? (e) Suppose now that for every unit of good r that the consumer buys, her employer provides her with an additional dollar to be spent on that good. Repeat question 3d under this assumption.

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution