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Consider two consumers, John and Maria, each with an quantity of two goods: corn and sugar.
a. John has 30 gallons of gasoline (G) and 20 bags of sugar (S); for that basket of goods, his MRS(GS) is 1G/5S. Maria has 30 gallons of gasoline (G) and 50 bags of sugar (S); for that basket, her MRS(GS) is 1G/1S. Note then that the economy's total G = 60 and total S = 70. Are there gains to be had for both John and Maria from trading? Who would trade what to realize gains? Explain and illustrate using an Edgeworth box diagram.
b. Suppose now that John has 40 G and 0 S and that his MRS(GS) is 1G/1S. Maria has 20 G and 70 S and her MRS(GS) is 3G/1S. Are there gains to be had for both John and Maria from trading? Explain and illustrate using an Edgeworth box.
Describe the budget constraint which she faces when deciding how many drinks to buy.
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Consider the two-period optimization problem when income in the second period is zero and the individual is a borrower. Suppose that interest rate declines. In a graph, identify the Hicks income and substitution effects of the interest rate change on..
A decrease in the wage rate
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The cost function for a firm is given by TC = 6,000 + 12.5Q. The firm sells output in a perfectly competitive market and other firms in the industry sell at a price of P = 25 - 0.5Q. (i) What level of output should be produced to maximize profits?
Your savings account was earning 3% interest. What are explicit and implicit costs of your decision. What is total opportunity cost this year of starting shop.
Other things equal, increasing home prices tend to:
U(x,y)=3x+y, where x and y represent the quantities of two goods, X and Y. The ocnsumer has I=60 , to spend on the two goods, and good Y costs Py=2 per unit. The price of good x, Px is also exogenous. Calculate the consumer's elasticity of demand for..
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