Find optimal consumption bundle of lobster and meat for jack

Assignment Help Business Economics

Reference no: EM131112228

Jack receives satisfaction(utility) from eating Lobster(L) and eating meat(M). He has an income of $1,000 and spends 25% of it in lobster and meat. The price of a pound of lobster is $50 and the price of a pound of meat is $10. Suppose that economists derive jack's utility function U = L1/2M1/2 using the theory of revealed preferences. Using Jason's utility function, the economists find the marginal rate of substitution between lobster and meet is MRSLM=-L/M

a) Write down the mathematical equation for Jack's budget constraint(BC). Rewrite the BC as a function of M

b) Find the optimal consumption bundle of lobster and meat for Jack. What is his level of utility at this bundle? Using Jack's utility at this bundle, find the utility curve equation as a function of M

c) Due to a great fishing season in Maine, the price of veal decreases to $25. Write down Jack's new BC. Then solve for the optimal bundle with the new price. What is his level of utility now?

d) Using the information from part b and c, find Jack's substitution and income effect for lobster. Is lobster a normal good or an inferior good

e) Graph Jack's consumption decision before and after the price changes. Show all curves(BCs, Us), label all the intercepts, also label all the quantities L & M and the substitution and income effect for lobster

f) Using the change in price and quantity of lobster, graph Jack's demand curve. From the two points used to graph the demand curve, derive Jack's demand function of the form P = a+bQd. Now rewrite the demand function as a function of P.

Reference no: EM131112228

Questions Cloud

Monopoly regulation began primarily because : In the United States, monopoly regulation began primarily because:

The growth rate of the money supply increases : Using the AD-AS graph, show and explain how real GDP growth and inflation would change in both the short run and long run if the growth rate of the money supply increases.

Shocks are real shocks or aggregate demand shocks : Indicate whether the following shocks are real shocks or aggregate demand shocks.

The marginal ?revenue product : The marginal ?revenue product is:

Find optimal consumption bundle of lobster and meat for jack : Jack receives satisfaction(utility) from eating Lobster(L) and eating meat(M). He has an income of $1,000 and spends 25% of it in lobster and meat. The price of a pound of lobster is $50 and the price of a pound of meat is $10. Find the optimal consu..

Workers in industrial countries earn much higher wages : Workers in industrial countries earn much higher wages than workers in developing countries because

How does increase in interest rates affect aggregate demand : How does an increase in interest rates affect aggregate demand? Briefly discuss how the increase affects each component of aggregate demand?

Unemployment rate fall below natural rate of unemployment : In which of the scenarios listed here will the unemployment rate fall below the natural rate of unemployment? There could be more than one answer. Inflation is steady at 3% for two years but then decreases to 1% for a year. Inflation is steady at 5% ..

Monetary policy is limited in its impact : Monetary policy is limited in its impact when There could be more than one answer.

User Account

All Pages