Budget Constraint 5

# Budget Constraint 5 - The Marginal Value (MV) of Perfume =...

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Jerry Imel Economics 301-2 Intermediate Moment #5 02/08/2011 1.) The Slutsky compensation allows for the consumer to purchase their original bundle. From previous exercises, we know that it is unlikely that they will actually purchase the original bundle, since the Px New = 1y and the original Px = 1/2y. It is likely that the consumer will purchase more Y. The substitution effect calculated by Slutsky exceeds the substitution effect calculated by Hicks, because the value of compensation is more in the Slutsky method.

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Jerry Imel Economics 301-2 Intermediate Moment #5 02/08/2011 2.) Margaret is not maximizing her satisfaction.
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Unformatted text preview: The Marginal Value (MV) of Perfume = 1/3 bottle of Champagne. The Marginal Value of Champagne = 3 ounces of Perfume. Since Margarets MV for Perfume = 1 bottle of Champagne (more than the cost), she is willing to buy more Perfume. On the other hand, since her MV for Champagne = 1 ounce of perfume (less than the cost), she is not willing to buy more Champagne. Therefore, Margaret has achieved satisfaction with Perfume, but not with Champagne. In order for her to achieve complete satisfaction, she would need to be satisfied enough that her MV for both products is less than the cost....
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## This note was uploaded on 10/09/2011 for the course ECON 301 taught by Professor Davis during the Spring '11 term at Ball State.

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Budget Constraint 5 - The Marginal Value (MV) of Perfume =...

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