Reference no: EM132314800
Consumer behavior, Demand
1. Consider consumer A. A goes to the shopping mall with $100 to spend on either clothing or games. The unit price for clothes (Pc) is assumed to be universal at $20, while the unit price for games (Pg) is universal at $5.
A has ranked his preferences of each unit of his consumption as follows:
|
Units of Consumption
|
Total Utility from Clothes
|
Total Utility from Games
|
Marginal Utility from Clothes
|
Marginal Utility from Games
|
|
1
|
100
|
40
|
|
|
|
2
|
170
|
60
|
|
|
|
3
|
220
|
70
|
|
|
|
4
|
240
|
75
|
|
|
|
5
|
255
|
78
|
|
|
|
6
|
265
|
80
|
|
|
|
7
|
270
|
82
|
|
|
|
8
|
273
|
81
|
|
|
a) Fill in the blanks for the table. Graph the Marginal Utility, Total Utility for each good.
b) Rank the Marginal Utility per dollar spent on each good. Find the optimal consumption bundle (Clothes, Games). What is the Total Utility obtained from such optimization behavior?
c) Now assume that the price of clothes decreases to $10. Draw the new Budget constraint, derive the new optimal consumption bundle. The optimal consumption bundle brings how much utility? Graph the old and the new optimality conditions on the same picture.
d) If the Substitution effect = 2 (Substitution effect of price change on quantity of Clothes) , what is the income effect? Again assume the IC is smooth, present the Income, Substitution, and Total Effect on the graph.
e) Consider the clothing demand for consumer A. We know that when the price is $20, A demands 4 units of clothes. When the price is $10, A demands 7 units of clothes. Assume that A's Demand for clothes is linear. Construct A's Cloth Demand function (quantity demanded of clothes as a function of Price of clothes)