practice5

practice5 - Practice with Consumer Surplus Lecture...

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Unformatted text preview: Practice with Consumer Surplus Lecture 5 &Econ 11, Summer Session C University of California, Los Angeles 1. Marc only purchases bacon, x , and prosciutto, y . He considers two strips of bacon the equivalent of one slice of prosciutto. (a) If bacon costs $2 per strip and prosciutto costs $4 per slice, what will Marc choose with his budget of $12? ANSWER: We recall that with perfect substitutes, we will ¡nd a corner solution. Therefore we must compare Marc¢s marginal rate of substitution to the price ratio. Marc¢s utility is described by U ( x;y ) = 2 x + y and so Marc¢s MRS is @U @x @U @y = 2 1 = 2 while the price ratio is p x p y = 2 4 = 0 : 5 Because Marc¢s MRS > p x p y , we know Marc will maximize his utility by choosing all bacon and exhausting his budget constraint: x & = M p x = 12 2 = 6 So Marc will optimally choose 6 strips of bacon and no prosciutto. (b) Suppose the price of bacon falls to $1 per slice. What will Marc choose to purchase?...
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practice5 - Practice with Consumer Surplus Lecture...

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