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ConsumerTheory Answers
ConsumerTheory Answers
ConsumerTheory Answers
1) M. Pm + P. Pp =I
• 20 M + 5 P = 1000
• M = 50 – ¼ P
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Answer 1 Answer 1
2) TU = ( M – 2 ) P •
• MUm = dTU/ dM = P • (1 ) can be rewritten as:
• P / 20 = (M – 2 ) / 5
• MUp = dTU/ dP = M - 2
• Or P =4M-8 (1)
• To maximize TU, 2 conditions must be • (2) Can be rewritten as: M = 50 – ¼ P
satisfied: (2)
• MUm / Pm = MUp / Pp (1)
• M. Pm + P. Pp = I (2)
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Answer 1 Answer 1
•
3) If Pp = 10: new budget equation:
• Substitute (2) into (1):
M = 50 – ½ P
• P = 4 (50 – ¼ P ) – 8 = 192 – P
To maximize TU, 2 conditions must be satisfied:
• ➨ P = 96
P / 20 = (M – 2 ) / 10 (1)
• M = 26
• TU max = ( M – 2 ) P = ( 26 – 2 ) . 96 = and M = 50 – ½ P (2)
2304 units of utility
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Answer 1 Answer 2
Answer 3 Answer 3
Answer 4 Answer 4
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Answer 5
Answer 5
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Answer 5 Answer 6
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Answer 6 Answer 6
2) Yes, 1 (10) + 6 (20) = $ 130 = I, so the budget 3) TU max when MUc / Pc = MUf / Pf
constraint is satisfied with this market At C = 5 and F = 4 ( MU / P = 4.70 ) and
basket. However, TU is not maximized since
( MUc / Pc ) = 6 > ( MUf / Pf ) = 4.5.The at C = 6 and F = 5 ( MU / P = 4.60 ), but this
consumer can increase TU by consuming market basket is too expensive, i.e., 6 ( 10 ) +
more Clothing. 5 ( 20 ) = $ 160
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Answer 7 Answer 7
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Answer 7 Answer 8
The price ratio ( Pt / Ps ) is 1/ 3 in both cases, so Clothing is measured on the vertical axis and
these lines are parallel. Food is on the horizontal axis.
Since he cannot afford to buy the first market The budget line is: 5 F + 10 C = 100
basket with the second budget line, no The ICs: C = 3, F = 2 or C = 6, F = 4 or C = 9, F = 6 .
inconsistency is revealed. He is clearly better ..
off in the first week.
Karen will reach the highest IC by buying only
food.
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Answer 8