{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Solutions_to_PS_4

# Solutions_to_PS_4 - ECON W3211.002 Intermediate...

This preview shows pages 1–2. Sign up to view the full content.

ECON W3211.002 Intermediate Microeconomics Problem Set 4 Due Monday, October 11, 2010 1. Perloff, Chapter 5: 30, 34, 36 30. Since pie and ice cream are complements, we may assume that she always eats them in the sam proportion, say Q p = τQ c , where τ is a positive constant. Denote P p and P c are the prices of pie and ice cream, respectively. Let I be Olivia’s income. Then P p Q p + P c Q c = I P p Q p + P c Q p τ = I Q p ( P p + P c τ ) = I Thus the demand function for pie is Q p = I P p + P c τ and Similarly, the demand func- tion for ice cream is Q c = I P p τ + P c 34. Notice that | MRS | = MU C MU B = B C = 1 2 . If ( C, B ) is an equilibrium, then it must satisfy the following conditions: (1) Optimality: | MRS | = MU C MU B = P C P B . (2) Feasibility: P C C + P B B I . From the optimality, we get P C P B = 1 2 = B C , and from the feasibility, 2 B + C = 120 . Hence the equilibrium consumption bundle is ( C * , B * ) = (60 , 30) . After tax, optimal- ity condition implies B C = 1 3 , and feasibility condition implies 3 B + C = 120 . Thus we equilibrium is ( C ** , B ** ) = (60 , 20) . Since P C = 1 , feasibility condition can be

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 3

Solutions_to_PS_4 - ECON W3211.002 Intermediate...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online