Mdtrm1_sampl_problm

Mdtrm1_sampl_problm - Ch 5: 5.7, 5.10, 5.15, 5.17 Ans: 5.7...

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

View Full Document Right Arrow Icon
Ch 5: 5.7, 5.10, 5.15, 5.17 Ans: 5.7 a) Denoting the level of income by I , the budget constraint implies that I y p x p y x = + and the tangency condition is y x p p x = 2 1 , which means that 2 2 4 x y p p x = . The demand for x does not depend on the level of income. b) From the budget constraint, the demand curve for y is, x y y y x p p p I p x p I y 4 - = - = . You can see that the demand for y increases with an increase in the level of income, indicating that y is a normal good. Moreover, when the price of x goes up, the demand for y increases as well. 5.10 a) The budget constraint is 240 2 8 = + y x and the tangency condition is 4 2 8 2 = = x y . Solving, the optimal bundle is ( x , y )=(20, 40) with a utility of 20 2 (40)=16,000. b) Now p y =8. We need to calculate p x such that, with the new prices, Ginger reaches exactly the same indifference curve as before. The new optimal bundle (x,y) must be such that: 16000 and , 240 8 2 = = + y x y x p x . The tangency condition now implies that 8 2 x p x y = that is, . 16 y x p x = Substituting this into the budget constraint we find that y=10. Using the condition
Background image of page 1

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

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/29/2012 for the course 220 320 taught by Professor Raven during the Summer '10 term at Rutgers.

Page1 / 7

Mdtrm1_sampl_problm - Ch 5: 5.7, 5.10, 5.15, 5.17 Ans: 5.7...

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

View Full Document Right Arrow Icon
Ask a homework question - tutors are online