Econ1-Winter2019-PS5.pdf - Econ 1 PS#5 Rational Spending Demand Winter 2019 1 a Briefly explain to someone who has never taken an economics class what

# Econ1-Winter2019-PS5.pdf - Econ 1 PS#5 Rational Spending...

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Econ 1 PS #5: Rational Spending & Demand Winter 2019 1.a.Brieflyexplain to someone who has never taken an economics class what the following condition means. 2211=pMUpMU. b.Give a brief intuitiveexplanation of how and whyan individual should change his or her optimal consumption of good 1 and good 2 if 1<pMUpMU. 2 2 1 2.Fiona consumes a positive amount of milk and a positive amount of cereal. Fiona’s marginal utility from drinking milk is 5 utils per ounce and her marginal utility from eating cereal is 10 utils per ounce. If the price of milk is 50 cents per ounce and the price of cereal is 80 cents per ounce, is Fiona maximizing her utility? If so, explain how you know. If not, explain how she should change her spending to increase her utility. 3.Suppose that for Ellen, the marginal rate of substitution between t-shirts and shorts is 3. In other words, Ellen is willing to give up 3 t-shirts in order to get another pair of shorts. a.Holding her consumption of shorts constant, would an increase in her consumption of t-shirts increase or lower her MRS? b.In words a 5thgrader could understand, explain for your answer in part a.