+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
With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 5
Suppose the demand for housing D is given by the function D=100p^-1r^-2 where p is the price of housing and r is the mortgage interest rate. Treat r as exogenous. The supply
Assuming he wishes to maximize profit, given these restrictions, formulate this decision problem as an LP model in general form. Solve it using Solver, and report and analyz
Using the Federal Reserve's report (see link below) on Money Stock Measures for June 7, 2012 determine the growth rate of the Seasonally Adjusted M1 Money Supply between Jan
Assume that the medical screening industry is perfectly competitive. Consider a typical firm that is making short-run losses. Suppose the medical screening industry runs an
What is the difference between fixed costs in the short run and in the long run? Why does it make sense for unprofitable firms to stay in business?Why do perfectly competitive
In evaluating a forage crop, it is important to meas- ure the concentration of various constituents in the plant tissue. In a study of the reliability of such measurements,
Share an example of a current consumer good that is taxed. Please link the article, along with a complete reference for me and fellow students to be able read the full article