ECN 104 Chapter 21: Chapter 21 - The Theory of Consumer Choice

39 views2 pages

amethystgoat54

11 Feb 2012

School

Ryerson University

Department

Economics

Course

ECN 104

Professor

Tsogbadral Galaabaatar

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

recall one of the ten principles from chapter 1: Buying more of one good leaves less income to buy other goods. Working more hours means more income and more consumption, but less leisure time. Reducing saving allows more consumption today but reduces future consumption. this chapter explores how consumers make choices like these. Hurley divides his income between two goods: fish and mangos. a consumption bundle is a particular combination of the goods, e. g. , 40 fish & 300 mangos. budget constraint: the limit on the consumption bundles that a consumer can afford. A fall in the price of fish has two effects on. A fall in pf boosts the purchasing power of hurley s income, allows him to buy more mangos and more fish. A fall in pf makes mangos more expensive relative to fish, causes hurley to buy fewer mangos & more fish. Notice: the net effect on mangos is ambiguous.

Related Questions

Suppose that there are two goods (X and Y). The price of X is $2 per unitu, and the price of Y is $1 per unit. There are two consumers ( A and B). The utility functions for the consumers are: for consumer A: U (X,Y)= X^.5Y^.5 and for consumer B: U(X,Y)=X^.8Y^.2

Consumer A has an income of $100, and Consumer B has an income of $300.

1. Derive the marginal utlities of goods X and Y for consumer A

2. Derive the marginal utilities of goods X and Y for consumer B

3. Set consumer A's MRS equal to the price ratio. Then use the budget constraint to solve for her optimal bundle

4. Set consumer B's MRS equal to the price ratio. Then use the budget contraint to solve for his optimal consumption bundle.

5. Calculate the MRS for each consumer at their optimal consumption bundles.

6. Suppose that there is another conusmer (let's call her C). You don't know anything about her utility function or her income. All you know is that she consumes both goods. What do you know about C's MRS at her optimal consumption bundle? Why?

crimsonbat715

The consumer is choosing between two goods- good1 and good2. Good 1 is priced at $2 and good 2 is priced at $3. The consumer has a total of $600 to spend on both the goods.

1. Let the utility function of the consumer be U (X1, X2) = X1^(1/2)X2^(1/2).

a) Calculate the Marginal rate of substitution.