(1) The following table presents Mary's marginal utility for each of the four goods she consumes to exhaust her income. The price of Good 1 is $1, the price of Good 2 is $2, the price of Good 3 is $3 and the price of Good 4 is $4.
|
Bundles
|
Marginal Utilities
|
|
Good 1
|
Good 2
|
Good 3
|
Good 4
|
|
A
|
0.21
|
0.06
|
1.76
|
0.59
|
|
B
|
0.22
|
0.54
|
0.56
|
0.18
|
|
C
|
0.17
|
0.34
|
0.51
|
0.68
|
|
D
|
0.20
|
0.46
|
0.61
|
0.27
|
|
|
|
|
|
|
|
|
(i) Write down the condition that will maximise Mary's utility in consuming four goods.
(ii) Which consumption bundle in the table will maximise Mary's level of utility? Explain your answer.
(a) Suppose that the price of petrol has risen by 50%. What happens to a consumer's level of well-being given he spends some of his income on petrol? Draw the impact of the increase in petrol prices in commodity space indifference curve diagram, and show the relevant indifference curves.
Now, if the individual's income rises just enough so that his original consumption bundle exactly exhausts his income, will the individual purchase more or less petrol (this level of income implies the consumer can afford his original consumption bundle)? Is the individual better-off at the higher price level of petrol with the higher income level or the original price of petrol and income?
(b) Suppose that the government subsidises housing expenditure of low-income families by providing a dollar-for-dollar subsidy to a family's housing expenditure. The Cunninghams qualify for this subsidy and spend a total of $500 per month on housing: they spend $250 of their own and receive a government subsidy of $250. Recently, a new policy has been proposed that would provide each low income family with a lump sum transfer of $250 which can be used for housing or other goods. Using a graph, demonstrate whether the Cunninghams would prefer the current program, the proposed program, or would be indifferent between the two.