1. A consumer is endowed with an income of m units which can be spent on...

 

Transcribed Image Text:

1. A consumer is endowed with an income of m units which can be spent on two goods, x and y, which can be purchased at prices px =2 and py=4, respectively. The consumer must consume some minimal amount of x to survive. Let this amount be denoted by b> 0. If x> b, the utility function for the consumer is u(x, y) = (x - b)y. For this utility function, the demands for the goods are given by MUxy; MU = (x - b). 2. Now suppose that the consumer in Question 1 is endowed with 4 units of good x and 6 units of good y, rather than any money income. Set b=4. a. Draw a graph showing this endowment and the consumer's budget line. b. Compute the consumer's full income. c. Compute the consumer's gross and net demands for the two goods. d. Which of your answers in parts (a)-(c) would change if both prices doubled, so that px =4 and py=8? Explain. 1. A consumer is endowed with an income of m units which can be spent on two goods, x and y, which can be purchased at prices px =2 and py=4, respectively. The consumer must consume some minimal amount of x to survive. Let this amount be denoted by b> 0. If x> b, the utility function for the consumer is u(x, y) = (x - b)y. For this utility function, the demands for the goods are given by MUxy; MU = (x - b). 2. Now suppose that the consumer in Question 1 is endowed with 4 units of good x and 6 units of good y, rather than any money income. Set b=4. a. Draw a graph showing this endowment and the consumer's budget line. b. Compute the consumer's full income. c. Compute the consumer's gross and net demands for the two goods. d. Which of your answers in parts (a)-(c) would change if both prices doubled, so that px =4 and py=8? Explain.