If equal multiple optimal bundles along the

Info icon This preview shows pages 16–19. Sign up to view the full content.

If equal: Multiple optimal bundles along the indifference curve/budget line. If greater: Corner solution where the optimal bundle is at the intersection between the budget line and the horizontal axis (consuming only good X). If less: Corner solution where the optimal bundle is at the intersection between the budget line and the vertical axis (consuming only good Y). X Y P P
Image of page 16

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

Solve the Rational Consumer’s Problem. Perfect Substitute Linear Utility Function Example: Problem 10 p.82 For Dan, coffee and tea are perfect-substitutes: one cup of coffee is equivalent to one cup of tea. Suppose Dan has $90 per month to spend on these beverages, and coffee costs $0.9/cup while tea costs $1.2/cup. Find Dan’s best affordable/optimal bundle of tea and coffee. How much could the price of a cup of coffee rise without harming her standard of living? Similarly, how much could the price of a cup of tea rise?
Image of page 17
Solve the Rational Consumer’s Problem. For Perfect Complement L-shape Utility Function. Notice U=min(aX,bY) This implies the optimal ratio is always aX=bY. Use the optimal ratio and the budget constraint to solve for the optimal solution for X and Y.
Image of page 18

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

Solve the Rational Consumer’s Problem. For Perfect Complement L-shape Utility Function. Example: Problem 16 p.83 Carlo budgets $9/week for his coffee and milk. He likes it only if it is prepared with 4 parts coffee, 1 part milk or U=min(C,4M). Coffee costs $1/unit, milk $0.5/unit. How much coffee and how much milk will Carlo buy per week? How will your answers change if the price of coffee rises to $3.25/unit?
Image of page 19
This is the end of the preview. Sign up to access the rest of the document.
  • Fall '12
  • Danvo
  • Utility, Cobb Douglas utility

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern