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
In a recession, share prices tend to be low and companies can be bought at low prices and workers hired for low wages. Given that recessions are only temporary, what stops y
What evidence is there to suggest that the United States is on the "flat of the curve" in health production? Is a typical developing country likely to be on the flat of it
other things the same, a fall in the economys overall level of prices tends to 1.rise both the quantity demanded and supplied of goods and services 2.rise the quantity demande
Politicians who support the green movement often argue that it is profitable for firms to pursue a strategy that is "environmentally friendly" (for example, by building fact
Sammy considers 2 wooden pencils to be a perfect substitute for 1 mechanical pencil.  The price of 1 wooden pencil is $2, and the price of 1 mechanical pencil is $3. Sammy h
What are the main causes of the 2007-2008 financial crisis and what are the consequences of this financial crisis? What policy measures did the US government and the Fed tak
You hear the argument that a reduction in the deficit will increase consumer and business confidence and thus reduce the decline in output that would otherwise occur with de