Consider the following exchange economy. There are two goods, tea and coffee, and two consumers, 1 and 2. Consumer 1 has utility function:
𝑈1 (𝑡1, 𝑐1) = 14 𝑙𝑛(𝑡1) + 34 𝑙𝑛(𝑐1) where 𝑡1 and 𝑐1 are the amounts of tea and coffee (respectively) that Consumer 1consumes. Similarly, Consumer 2 has a utility function: 𝑈2 (𝑡2, 𝑐2) = 34 𝑙𝑛(𝑡2) + 14 𝑙𝑛(𝑐2) where 𝑡2 and 𝑐2 denote the amounts of tea and coffee (respectively) that Consumer 2 consumes. Consumer 1 is endowed with 12 units of tea and 32 units of coffee. Consumer 2 is endowed with 4 units of tea and 16 units of coffee. Suppose the price of coffee is normalized to 1, and let p denote the price of tea.
(a) Derive the demand functions of the two consumers for tea and coffee.
(b) Derive the competitive equilibrium price of tea in this economy and the equilibrium quantities of tea and coffee consumed by each consumer.
Consider the following exchange economy. There are two goods, tea and coffee, and two consumers, 1 and 2. Consumer 1 has utility function:
𝑈1 (𝑡1, 𝑐1) = 14 𝑙𝑛(𝑡1) + 34 𝑙𝑛(𝑐1) where 𝑡1 and 𝑐1 are the amounts of tea and coffee (respectively) that Consumer 1consumes. Similarly, Consumer 2 has a utility function: 𝑈2 (𝑡2, 𝑐2) = 34 𝑙𝑛(𝑡2) + 14 𝑙𝑛(𝑐2) where 𝑡2 and 𝑐2 denote the amounts of tea and coffee (respectively) that Consumer 2 consumes. Consumer 1 is endowed with 12 units of tea and 32 units of coffee. Consumer 2 is endowed with 4 units of tea and 16 units of coffee. Suppose the price of coffee is normalized to 1, and let p denote the price of tea.
(a) Derive the demand functions of the two consumers for tea and coffee.
(b) Derive the competitive equilibrium price of tea in this economy and the equilibrium quantities of tea and coffee consumed by each consumer.
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Assume that an individual consumes three goods, X, Y, and Z. The marginal utility (assumed measurable) of each good is independent of the rate of consumption of other goods. The prices of X, Y, and Z are, respectively, $1, $3, and $5. The total income of the consumer is $65, and the marginal utility schedule is as follows:
Units of good | Marginal utility of X (units) | Marginal utility of Y (units) | Marginal utility of Z (units) |
1 | 12 | 60 | 70 |
2 | 11 | 55 | 60 |
3 | 10 | 48 | 50 |
4 | 9 | 40 | 40 |
5 | 8 | 32 | 30 |
6 | 7 | 24 | 25 |
7 | 6 | 21 | 18 |
8 | 5 | 18 | 10 |
9 | 4 | 15 | 3 |
10 | 3 | 12 | 1 |
(a)Given a $65 income, how much of each good should the consumer purchase to maximize utility?
(b)Suppose income falls to $43 with the same set of prices; what combination will the consumer choose?
(c)Let income fall to $38; let the price of X rise to $5 while the prices of Y and Z remain at $3 and $5. How does the consumer allocate income now? What would you say if the consumer maintained that X is not purchased because he or she could no longer afford it?