Practical problems in price theory
Course:- Microeconomics
Reference No.:- EM1373

Assignment Help
Expertsmind Rated 4.9 / 5 based on 47215 reviews.
Review Site
Assignment Help >> Microeconomics

Problem - Consider Garfield's utility function given as

U(x1, x2) = x1x2,

where x1 is lasagna and x2 is "everything else". Suppose his allowance from Jon is

m = $8 and p1= $1 and p2= $1

(i) Find Garfield's optimal choice of lasagna and everything else and illustrate your answer graphically. Show your work.

(ii) Find an expression of Garfield's marginal rate of substitution between lasagna and all other goods and explain its meaning at the initial choice that you found in (i).

(iii) If the price of lasagna doubled, i.e., p1 increased from p1= $1 to p0= $2, what would be Garfield's new optimal bundle? Show the bundle on your graph.

(iv) Under the assumption that Garfield's demand for lasagna is linear, derive the demand equation from his two optimal bundles computed in (i) and (iii). Illustrate your answer graphically by drawing two graphs: one representing Garfield's optimal choice and the other representing his demand curve for lasagna driven from the two optimal bundles.

(v) Compute Garfield's price elasticity of demand for lasagna between the two prices p= $1and p0= $2 and explain its meaning.

(vi) Compute Garfield's price elasticity of demand at p1= $3:

(vii) If Garfield always consumes lasagna with garlic bread. Show the effect of an increase in the price of wheat on (a) the wheat market, (b) the bread market, and (c) the market for lasagna. Draw three graphs to illustrate your answer (one graph for each market). No calculations are necessary.


This problem in price theory of economics deals with deriving maximum marginal utility, marginal rate of substitution and price elasticity of demand.

Put your comment

Ask Question & Get Answers from Experts
Browse some more (Microeconomics) Materials
Using the Neoclassical Growth model, analyze the impact of an increase of a lump sum tax on the equilibrium using both the phase diagram in c and k as well as the one in k and
Write a rewards program you believe would be especially effective at your current (or future) place of work. Provide evidence that supports that your program would likely
Calculate the demand and supply functions for this market. Find the equilibrium price and quantity in this market. The government puts a tax of $5 on portable CD players, requ
Suppose the US government requires firms to provide Workers Compensation Insurance Coverage for its employees. How does this mandate affect labor market outcomes (employment a
The first picture is just the question. The second picture shows the available options to move point A. The third and fourth pictures show where the line is able to move to. I
What is Tivo, and how does it fit into someone's living room? (For additional info: If you haven't seen Tivo in action, try finding a friend that has.) What constitutes Tivo
How is total risk measured? What is a portfolio? Why is the standard deviation of a portfolio less than the average standard deviation of the assets in the portfolio? What is
Using indifference curves and budget constraints, show how a government program that increases education and job training for low-skilled women can increase low-skilled fema