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Find the optimal consumption bundle

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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)

Verified Expert

There is one question with few parts based on consumer behaviour and demand. The question uses the concept of marginal and total utility with the formation of graphs. The optimal condition of consumer equilibrium concept is used in this assignment. The substitution and income effect is used in this assignment. The assignment also deals with the demand function formation using slope formula.

Reference no: EM132314800

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