additional hour in leisure rather than preparing food. c) (4 marks) Juanita chooses to spend one-quarter of her time in leisure. In the diagram in (a)‚ show that this is her optimal choice‚ and indicate the division of her time. Ans: need an indifference curve tangent to the budget line at leisure = 18/4 = 4.5. Remainder of time is spent in home production. Now suppose that Juanita is able to engage in paid employment as well as leisure and homework. Paid employment offers her a wage of $12 per hour;
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by creating as set of contour plots of DM’s implied utility function. Figure 1 plots a set of "indifference curves" assuming a utility function of U = X Y. FIGURE 1 U=X^1Y^1 100 U= 1 U= 8100 U= 6400 U= 4900 U= 3600 U= 2500 Y 60 80 40 U= 1600 U= 900 U= 400 U= 100 0 20 0 20 40 X 1 60 80 100 Marginal Rate of Substitution The slope of the indifference curve is called DM’s Marginal Rate of Substitution (MRS) and provides information with respect to tradeoff’s
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individual’s labour supply. These effects are the same as would be under an increase in the wage rate‚ shown diagrammatically in Figure 2. {draw:frame} Figure 2: Diagram showing the effects of a wage increase The movement around the original indifference curve from A to C is the substitution effect; this arises due the change in price of leisure relative to hours of work‚ holding utility as constant. As the wage rate has increased the opportunity cost of leisure opposed to work has risen. The substitution
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optimal bundle contains 10 scones. b) (2) Illustrate his optimal bundle in your diagram for (a); label it A. Why is this choice optimal? What conditions does it satisfy? Ans: This bundle maximizes Rajan’s utility‚ because it is on the highest indifference curve he can attain given his income and the prices he faces. The two conditions are i) it is on his budget line‚ so all his money is spent‚ and ii) at this bundle his marginal rate of substitution is equal to the price ratio. c) (2) How many kg
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The Utility Concept in Economics I. Background. Utility is a measurement of consumer preferences made under a variety of assumptions with respect to the decision context being studied. The point of the utility measurement is to enable the study of behavior within the framework of the assumptions made in a fashion that takes advantage of mathematical tools. There are three decision frameworks: Certainty: The consumer knows without risk or uncertainty the outcome of making a choice. Choices
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the change in Yap’s allowance. 2. Assume that Lina can buy gum or candy. A pack of gum costs $.30 and a candy bar costs $.50. Lina has $3.00 a day to spend on gum and candy bars. Draw Lina’s budget constraint. Shade in Lina’s choice set. On the graph show how LIna’s budget constraint will be affected if the price of gum increases to $.50. [pic] 3. When the price of raisins falls‚ the quantity of raisins demanded rises. Explain this change in terms of income and substitution effects.
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1. Explain the behavior of consumer from the point of view of Utility Theory. As consumers‚ we are constantly forced into making choices. They face a variety of goods and services which can be purchased‚ but often are limited by the amount of money with which those purchases can be made. The utility theory‚ also sometimes referred to as the consumer behavior theory‚ is often used to explain the behavior of individual consumers and the amount of satisfaction a consumer derives from the consumption
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Consumer Choice Exercise 1. Function U allows us to know how that agent orders different combinations of goods x e y according to his preferences. For each of the following representations what is the shape of the indifference curves and what is the marginal rate of substitution (MRS)? What does that tell you about the agent’s preferences? a. U x 2 y x y b. U min ‚ 3 4 c. U xy d. U x 2 y Exercise 2. Consider the following utility functions: a. U ( x‚ y) ( x
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units of X for 1 unit of Y. c. What is the marginal rate of substitution? X = 2‚ Y = 8 X = 4‚ Y = 2 ∆Y∆X=MRS -( 8-2 )( 2-4 )= - 62=3 8 6 4 2 1 2 3 4 5 Question 7: Suppose a customer has indifference map shown below. The relevant budget line is LZ. The price of Y is $10. 60 50 L 40 B 30 20 10 A M 0 10 20 30 40 50 60 70 80 a. What is the consumer’s income? Quantity Y = 50
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property of an indifference curve? Question 5 answers | | An indifference curve is convex to the origin / | | | The consumer is indifferent between any two points on an indifference curve / | | | The marginal rate of substitution diminishes as you move down the indifference curve | / | | As you move from one indifference curve to another indifference curve closer to the origin‚ utility increases | An indifference curve is Question 6
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