Describe utility function, Macroeconomics

Suppose that Mr. Chauncey Gardener consumes two goods, X1 and X2 .His preferences can be described by the following utility function:

U = X10.5X20.5

He faces the following prices in the market: P1 = $5.00 and P2 = $10.00. His income is $1,000. Assume that he spends all his income.

A.   How much will he buy of commodities 1 and 2? Explain your answer.

B.   Suppose that the price of commodity 2 rises by $2.50 (from $10.00 to $12.50); what will be the change in the quantities consumed of goods 1 and 2? Explain.

C.  In the previous question (part B), take the change in the quantity consumed of commodity 2 and decompose it into an amount associated with the substitution effect and another one connected to the income effect (use the Slutsky decomposition discussed in class).

In answering these questions, remember to provide numerical answers and to explain where your answers come from.

 

Posted Date: 3/18/2013 5:36:35 AM | Location : United States







Related Discussions:- Describe utility function, Assignment Help, Ask Question on Describe utility function, Get Answer, Expert's Help, Describe utility function Discussions

Write discussion on Describe utility function
Your posts are moderated
Related Questions
What impact will an unanticipated increase in the money supply have on the real interest rate, real output, and employment in the short run? How will expansionary monetary policy a

The director of admissions at Kinuza University in Nova Scotia estimated the distribution of student admissions for the fall semester on the basis of past experience. What is the e

explain with illustration the meaning of credit creation in commercial banks

what wil hapen to the real wage if the nominal wages and prices rise at the same rate per year?

how can a country maintain equilibrium GDP with foreign trade?

Businesses often decide between using automation and labor in production. An automotive environment may have high fixed costs and low variable costs, and an industry that utilizes

why is international trade important for South Africa?

INTRODUCTION TO DEMAND ANALYSIS: It is generally seen that market demand curve is downward sloping. Market demand curve (or sometimes called Aggregate demand curve) is nothing

use a graph of the classical labour market to illustrate the effects of a real wage existing in the market that is lower thhan the equilibrium real wage

Suppose Zippy's Banana Juice can produce according the following long-run production function. Q = 5 L 2 + 20 K - 0.4 K 2 where Q is gallons of juice per hour, L is labor hours,