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
Unfortunately banks are reluctant to make loans to people who currently have low incomes, even if there is a good chance their incomes will be higher in the future. If peop
a)Explain how the marginal principle and the pollution tax work together to determine the optimal amount of pollution abatement. b)Economists say that labor demand is a derive
Write a report addressing a quantitative analysis (QA) project. Select a business of interest and develop QA best practices that can be developed and implemented to increas
What are the ethical issues? Where are there breaches of ethical behavior? How could each ethical theory you cite help people think about what constitutes virtuous or ethical
The concentrations of urea and of uric acid were measured for each specimen, and the correlation between these two concentrations was found to be r = 0.2291. Test the hypoth
The anticipated time required for each auditor on each job is given in the table below. Use the Hungarian method to determine which auditor should be assigned to which job.
A jeans manufacturer operates twin plants- one in Juarez, Mexico and the other in El Paso, Texas. The Juarez plant cuts fabric for the jeans, and the El Paso plant assembles t
Describe the Indian Reorganization Act or "Indian New Deal"? In what ways was it a departure from previous policy? How did it change thinking about the place of Indians in A