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Tutorial 2 - Rational Consumer Choice

# Tutorial 2 - Rational Consumer Choice - happy it makes her...

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(Chapter 3 including Appendix) Tutorial 2 - Rational Consumer Choice Consumerella is a girl who likes bling and things. Bling is expensive, (the price of bling is P b ) and other things (composite good T, price given by p t ) are relatively cheaper. If Consumerella's sweetheart provides her with income (m), please draw a budget constraint from the information given. a) Consumerella's beau has money to spare and would like you to confirm that his Bella 'Ella has rational preferences , as he has witnessed her sporting a ton of bling and but not very many other things... Using an indifference map, explain the theoretical condition that must hold for 'Ella to be considered a rational consumer, and be sure to mention the importance of the slope of the budget constraint and utility curve. b) Say Consumerella's preferences are described by U(b,t)=b 4 /5 t 1/5 and P b = R100, p t =R50. You have discovered that 'Ella's allowance is R50000, and Consumerella's darling wants to know which consumption bundle maximises her utility, and just how
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Unformatted text preview: happy it makes her. Please use the Lagrangian Optimisation technique to calculate the bundle of bling and things that will make 'Ella happiest, and the level of utility this bundle confers. c) Benjie the Beau, upon discovering that 'Ella's bundle of bling and things is indeed rational, really would prefer her to consume more things. ..so he decides to introduce a kink in her budget. Assuming that Benjie can influence both 'Ella's allowance and prices use budget constraints to illustrate: The effect of providing a R10000 voucher to be spent exclusively on things. .. a. The effect of raising the price of bling beyond a quantity threshold of bling of 200 b. The effect of reducing the price of things below a quantity threshold of bling of 200 c. d) Of a., b. and c. above which do you consider the most effective way for Benjie to encourage 'Ella's consumption of things instead of bling? e) Tutorial 2 Page 1...
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