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

Assignment Help
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
How does Wal Mart dividend payout, dividend yield, and dividend per share compare to other companies in its industry? Has the company's dividend strategy been similar to oth
What is the cost of using this machinery for one year? How would your answer be different if the machinery had not yet been purchased?
Using the given table, find out the quantity where MC = ATC. Find out the quantity where ATC is at its minimum. Find out the quantity that is the most efficient operating po
What is a monetary rule, as opposed to a monetary policy? What monetary rule would Milton Friedman have liked the Fed to follow? Why has support for a monetary rule of the k
Could it be possible that a government regulation led to flash crash and what does it mean "it's like a balloon"? What is like a balloon? Why is it like a balloon?
Discuss the usefulness of swaptions (swap options) relative to the current economic environment. Give three specific examples of how a bank can use this derivative both for
Consider two occupations (A and B) that employ people with the same skills and abilities. When employed, workers in the two occupations work the same number of hours per day.
Ethan Nicholas developed his first game while still working as a programmer for Sun Microsystems. After his first game was a success, he quit Sun to form his own company-wit