Reference no: EM132444919
Q1. Meghan's preferences are characterized by the utility function U(X, Y) = 4X0.5 Y0.5 If she assigns I = $750 monthly to these goods. The price for each unit of X is $25 and the price for each unit of Y is $50.
a. Calculate the MRSX,Y
b. What is Meghan's optimal affordable bundle?
c. Graph your results and show the typical IC curve. Make sure all relevant pieces of information are identified in your diagram.
d. Suppose the government decides to ration the amount of good X such that the maximum she can purchase is 10 units, how many units of Y will Meghan now purchase if she spends her entire income?
e. On your diagram, clearly show the impact on the availability of X on Meghan's utility.
Q2. Suppose Karim can buy fresh corn at the Halifax Farmers Market for 50 cents per ear and at that price hr purchase 6 ears each Saturday. What would you expect to happen to Karim's consumption of corn if the Market introduced a new offer which would enable consumers to continue purchasing corn at 50 cents an ear for the first six ears, but at 25 cents for each additional ear? Karim's preferences for corn can be illustrated by a typical Cobb-Douglas utility curve. With the aid of an appropriate diagram, explain (with words) your answers.
Q3. Rachael's ratio of marginal utility to price for good A is 10, and the ratio of marginal utility to price for good B is 5. Assume that for her current consumption of goods A and B the Rachael is experiencing diminishing marginal utility for each good. Is Rachael's current consumption bundle optimal? If so why? If not how she adjust her consumption to maximize utility? Explain your answer.