Unformatted text preview: 2 , the consumer selects basket A. When the budget line is BL 1 , the consumer selects basket B. What can be said about the way the consumer ranks the baskets in each case? 3) A consumer can spend her fixed income, I , on two products, food ( F ) and luxuries ( L ). The consumer’s tastes are represented by the following utility function: U = FL Where the marginal utilities of F and L are MU F = L and MU L = F and prices are P F and P L for goods F and L, respectively. Question: Are luxuries a normal good for this consumer? Please show all your work and explain your reasoning carefully. 4) Jim’s preference over pizza (x) and other good (y) are given by U(x,y)=xy. His income is $120. a. Calculate his basket when price of pizza is 4 and price of y is 1. b. Calculate his income and substitution effect of a decrease in the price of food to $3....
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- Spring '11
- optimal consumption basket, consumer selects basket