Question: Esther consumes goods X and Y, and her utility function is U(X, Y) = XY + Y. For this utility function, MUX = Y MUY

Esther consumes goods X and Y, and her utility function is U(X, Y) = XY + Y.
For this utility function,
MUX = Y
MUY = X + 1.
a. What is Esther's MRSXY? Do her preferences satisfy the declining MRS property?
b. Suppose her daily income is $20, the price of X is $4 per unit, and the price of Y is $1 per unit. What is her best choice? What is the (own) price elasticity of her demand for good Y starting with these prices and income? At what price for good Y is Esther's expenditure on good Y largest?
c. Suppose the price of good Y rises to $4 per unit. What is her new consumption bundle? Decompose the change in her purchases into income and substitution effects. What is Esther's compensating variation for the price change?

Step by Step Solution

★★★★★

3.37 Rating (163 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

a Esthers MRS XY YX 1 Her preferences satisfy the declining MRS property b Her best choice is X2 Y12 Esthers utility when her daily income is 20 the p... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

847-B-E-D-S (2698).docx

120 KBs Word File

Students Have Also Explored These Related Economics Questions!

Suppose that each consumer consumes goods X and Y with preferences represented by the utility function: U(X, Y) = X + 2Y. Each consumer has income of $150. The supply curve for good X is horizontal...

Suppose Juan's preferences over goods X and Y can be expressed by the utility function U = 2X + Y, while Charlie's preferences can be expressed by the utility function U = min (3X, 2Y). Suppose that...

Suppose a consumer's preferences for goods X and Y can be described by the utility function U(X, Y) = (AXR + BYR)1/R, where A and B are positive numbers and R is a number that can be either positive...

Esther consumes goods X and Y, and her utility function is U(X, Y) = XY + Y a. What is Esther's MRSXY? Do her preferences satisfy the declining MRS property? b. Suppose her daily income is $20, the...

Roisin consumes only two goods, X and Y, and her utility function is given by U = XY. Her income is E100 and the price of X is E20 and the price of Y is E5. In equilibrium Roisin will choose which...

1.If a college tuition is $2000 this semester, books cost $400 and you can only work 10 hours rather than 40 what is the opportunity coat of attending college? 2.Suppose a consumer buys two goods x...

Please show explanation with the solution, thank you!! They are both free response. 1) Imagine you consume two goods, X and Y, and your utility function is U = XY.Your budget is $100, the price of...

Four blanks to be answered. Thank you! Suppose you consume only two goods: X and Y , and your utility function is described as U = U(X, Y ) = XY. Suppose your income is $36. The price of X is $2, and...

Will and Kate share a house. They each have a weekly budget of 12 to spend on green smoothies (good X) and cups of bubble tea (good Y), which are priced at PX = E2 anld P}! = 3 in their local caf....

microeconomics The Government Sponsored Enterprises (GSEs) play a key role in the U.S. mortgage finance system. The public mission of the GSEs is to support homeownership. In practice, this is partly...

A good structure diagram should be loosely coupled yet strongly cohesive. How can you achieve both characteristics simultaneously? What implications do these characteristics have on error-prone...

What is a managed float? What are the disadvantages of freely floating exchange rates that led countries to the managed float system?

Suppose you borrow $ 1 3 5 1 3 . 1 0 when financing a gym valued at $ 4 4 9 7 9 . 8 0 . Assume that the unlevered cost of the gym is 2 1 . 6 9 % and that the cost of debt is valued at 1 0 . 1 0 % ....

A stakeholder identifies a potential delay in a critical activity. What should the project manager do? a) Ignore the delay and continue with the project b) Evaluate the impact of the delay and take...

1. The reservation price is the price at which the consumer is _______ about additional search, meaning that the _______ of search equals the _______. 2. If a consumer knows that a product is...

LoJack, a system used to recover stolen vehicles, is a private good that generates external benefits. A small, silent transmitter hidden in a vehicle allows police to track a stolen car. The name is...

Q.No.2 (5 marks) Three independent projects, each of which requires a RS 5 million investment are being considered for investment purpose by Sona Tea Company. The cost of capital and estimated...

Recently, a nurse commented that when a patient calls the medical advice line claiming to have the flu, the chance that he or she truly has the flu (and not just a nasty cold) is only about 4%. Of...

A forward contract with a settlement date at time T is issued based on an underlying asset with a current market price of B. The annualised risk-free force of interest applying over the term of the...