ec-9 - b Explain the consumer equilibrium in words 3...

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E201 Spring 2009 Homework #4 The questions below draw from the material in the reading on Marginal Utility Analysis (at ereserves (http://ereserves.indiana.edu/coursepage.asp?cid=32&page=01). The password is: water. As with other problem sets, I encourage you to work on these problems in a small group, but the answers you hand in at CL must be your own. 1. Complete the following table: Units TU X MU X MU X /PX TU Y MU Y MU Y /P Y 1 10 5 2 17 9 3 20 12 4 22 14 5 23 15 a. Suppose that the consumer has $17.00 income to spend on two goods, X and Y. If the price of X is $2 per unit and the price of Y is $3, which good does this consumer purchase first? Why? b. How much of X and Y will the consumer purchase if all income is spent? c. Suppose the price of X rises from $2 to $4, other things constant. How much of X and Y will be purchased? 2. a. State the equilibrium condition for a consumer in terms of utility theory.
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Unformatted text preview: b. Explain the consumer equilibrium in words. 3. Suppose that the MU of socks equals the MU of T-shirts. If the price of socks is less than the price of T-shirts, what will a rational consumer do? 4. Suppose that the MU of ice cream is 100 utils and the price of ice cream is $2.00. If the price of cookies is $1, and the consumer is in equilibrium, what is the MU of a cookie? 5. Joe Cool wants to purchase either a Mazda Miata or a Porsche. Suppose that the Miata yields 100,000 jollies, while the Porsche yields 200,000. The price of the Miata is $18,000 while the Porsche is $54,000. Using utility theory, state an explanation for which car Joe will buy. 6. For each question you missed on Exam 1, write a convincing explanation: explain why the incorrect response is wrong and why the correct answer is right....
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