+1-415-670-9189
info@expertsmind.com
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.

Summary:

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
 
Minimize


Ask Question & Get Answers from Experts
Browse some more (Microeconomics) Materials
Take a look at the U.S. Department of Energy's OPEC Fact Sheet at http://www.eia.doe.gov/emeu/cabs/opec.html. What are some recent developments in petroleum pricing? How rel
Describe how American firms can take advantage of conducting business in an emerging market such as the Indian economy - How should U.S. firms in general adapt to globalizatio
In the space below draw two separate graphs. In the first graph (label this Joe's PPF) draw Joe's PPF measuring basketballs on the horizontal axis and dozens of doughnuts on
Based on a Rate-of-Return analysis of alternatives A & B alternative B was selected. A Net Equivalent Uniform Annual analysis of the same alternatives led to the selection o
Consider the BP oil spill that spawned a heavy public relations campaign after beaches were closed and wildlife was affected. Did BP use a proactive or reactive strategy? Expl
The short-run production function of a profit maximize firm is given by f(l) = 6l2/3, where l is the amount of labor it uses. The cost per unit of labor is w = 6 and the price
Calculate MC and then use the same equation to find out the new price. ¦e¦is the absolute value of demand elasticity and determine the breakeven output and total sales revenue
Suppose π = 0.1. Compute the expected value E(X) and the expected utility E(u(X)) of the lottery X = Xb π Xg 1 - π! that he faces if he steals, where Xb is his income if he