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35. Ron starts out in consumer equilibrium, consuming two goods, X and Y. Ron's income rises. At this point, we can definitely conclude that A) MUX/PX > MUY/PY, and then Ron increases his consumption of X. B) MUX/PX > MUY/PY, and then Ron decreases his consumption of X. C) MUX/PX < MUY/PY, and then Ron increases his consumption of X. D) MUX/PX < MUY/PY, and then Ron decreases his consumption of X. E) none of the above.

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Related questions

Suppose that the extended (generalized) demand function for good Y is:

QdY= 250,000 - 500 PY -1.5 M + 240 PX

where: QdY = quantity demanded of good Y

PY = Price of good Y

M = Average income of consumers

PX = Price of related good X

a) If M = $ 60,000 and PX = $100, what is the reduced demand function for good Y?

b) Continue using the reduced demand equation from part a,

If M = $60,000, PX = $100, and PY = $200 then QdY = ________

If M = $60,000, PX = $100, and PY = $300 then QdY = ________

Use this information (prices and quantities demanded of good Y) to calculate the price elasticity of demand between these two points on the demand curve of good Y. Show your work.

c) Use your answer to part b. Between these two points on the demand for good Y, is demand elastic, inelastic, or unitary price elastic? Why? What will happen to total revenues if the price increases between these two points on the demand curve?

d) In part b, you found that when:

M = $60,000, PX = $100, and PY = $200 then QdY = ________

Now let's suppose that the price of the related good X decreases from $100 to $50 but income remains constant (at $60,000). Assume that the price of good Y is also constant at $200.

If M = $60,000, PX = $50, and PY = $200 then QdY = ________

Use these prices of good X and the quantities demanded of good Y to calculate the cross-price elasticity of the demand for good Y when the price of good X decreases from $100 to $50.

e) Consider your answer to part d. Based on the value of the cross-price elasticity of demand you just estimated, are goods X and Y substitutes, complements, or unrelated? Why?

f) In part b, you found that when:

M = $60,000, PX = $100, and PY = $200 then QdY = ________

Now let's suppose that consumer income increases from $60,000 to $80,000 but the price of good X remains constant (at $100). Assume that the price of good Y is also constant at $200.

If M = 80,000 , PX = $100 and PY = $200 then QdY = _________

Use these income levels and quantities demanded of good Y to calculate the income elasticity of the demand for good Y when income increases from $60,000 to $80,000.

Show your work

g) Consider your answer to part f. Based on the value of the income elasticity of demand you just estimated, is good Y normal, inferior, or income independent?

1. (Law of Diminishing Marginal Utility) Some restaurants offer “all you can eat” meals. How is this practice related to diminishing marginal utility? What restrictions must the restaurant impose on the customer in order to make a profit? (Answers may vary)

2. (Marginal Utility) Is it possible for marginal utility to be negative while total utility is positive? If yes, under what circumstances is it possible?

3. (Role of Time in Demand) In many amusement parks, you pay an admission fee to the park but you do not need to pay for individual rides. How do people choose which rides to go on? (Answers may vary)

4. What is the diamonds-water paradox, and how is it explained? Use the same reasoning to explain why bottled water costs so much more than tap water.

5. Please read Jane Katz’s “The Joy of Consumption: We Are What We Buy,” in the Federal Reserve Bank of Boston’sRegional Review at http://www.bos.frb.org/economic/nerr/rr1997/winter/katz97_1.htm and briefly discuss/summarize the evidence that Katz cites about how the rising value of time has affected consumer spending patterns.

6. Suppose that marginal utility of Good X = 100, the price of X is $10 per unit, and the price of Y is $5. Assuming that the consumer is in equilibrium and is consuming both X and Y, what must the marginal utility of Y be? (Hint: Please apply the formula: MUx/Px = MUy/Py)

7. What is consumer surplus? What happens to consumer surplus as price level falls?

8. Do you think any good which does not exhibit the law of diminishing marginal utility?

An MBA student has proposed the following demand equation for good Y. QdY = a + b PY + c M

where: QdY = quantity demanded of good Y in millions of tons per year PY = Price of good Y in dollars per ton M = Average consumer income in thousands of dollars

What sign should this student expect a, b, and c to have? Explain.

The regression output from the computer is as follows:

Dependent Variable:

QdY R-Square F-ratio p-value on F

Observations: 90 .4 12.84 0.015

Variable Parameter Estimate Standard Error T-ratio P-Value

Intercept 60.00 5468.32 3.12 0.0082

PY -1.00 0.65 -1.27 0.2145

M 0.02 3.29 5 .12 0.0121

This economist is confortable using parameter estimates that are statistically significant at the 10 percent level or better.

Does PY have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.

Does M have a statistically significant effect on the quantity demanded of good Y? Explain, using the appropriate p-value.

What fraction of the total variation in the quantity demanded of good Y remains unexplained? What can the student do to increase the explanatory power of his demand equation? What other variables might he add to his demand equation?

What is the expected quantity demanded of good y when PY = 200 and M = 10,000?

If demand decreases and supply increases simultaneously then for sure a. Prices will increase b. Prices will decrease c. Quantities will increase d. Quantities will decrease e. None of the above

Which of the following will increase the demand for chicken? a. An increase in the price of red meats b. A decrease in the price of red meats c. An increase in the price of chicken d. A decrease in the price of chicken e. None of the above

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