Ask a question from expert

Ask now

Assignment on Price Theory

7 Pages804 Words183 Views
   

The University of New Castle Australia

   

Price Theory (ECON1268)

   

Added on  2020-03-01

About This Document

In this document, we will cover questions and answers on Price Theory. We cover the following topics: deriving the optimal consumption basket, the expression for sally's marginal rate of substitution, sally's optimal consumption basket, sally's new optimal consumption basket if the price of coffee increases to Px, is coffee a Giffen good for sally and income and substitution effects associated with an increase in the price of coffee.

Assignment on Price Theory

   

The University of New Castle Australia

   

Price Theory (ECON1268)

   Added on 2020-03-01

BookmarkShareRelated Documents
MARGINAL UTILITY 1Marginal UtilityCourseNameInstitution AffiliationQuestion 1: Without deriving the optimal consumption basket, show that the basket with x = 25 cups of coffee, and y = 50 litres of milk, is NOT optimal. (3 marks)OptimalBundle=MUxMUy=PxPy
Assignment on Price Theory_1
MARGINAL UTILITY 24150254121It is therefore not an optimal bundle since it doesn’t meet the condition for optimality.Question 2: Derive the expression for Sally's marginal rate of substitution. (1 Mark)Marginal Rate of substitution is given by dydx=MUxMUy= 20x1= 20xQuestion 3: Find Sally's optimal consumption basket. (3 Marks)OptimalBundle=MUxMUy=PxPy20/251=41
Assignment on Price Theory_2
MARGINAL UTILITY 320/51=41 = 4Sally should consume 4 times as much for milk for every cup of coffee200 = Px X + PyY200 = 4x + ybut y = 4x200 = 4x + 4x= 200 = 8xx = 25y = 100Question 4: Find Sally's new optimal consumption basket if the price of coffee increasesto Px = $5 per cup. (3 Marks)MUxMUy=PxPyMUxMUy=51
Assignment on Price Theory_3

End of preview

Want to access all the pages? Upload your documents or become a member.

Related Documents
Microeconomic- Assignment
|9
|1427
|70

ECON1268- The Indifference Curve | Price Theory
|7
|966
|98