Question

es the consumer buy at the higher price of beer and her new different consumption bundle from O? llicks compensation? Explain h. Using red ink, draw the draw the new budget line and label the new optimal point, Point C. books and CDs does the consumer purchase at the new prices and her original which income? old new budget line in blue ink and label the new optimal consumption bundle, Point j. Draw this new budget line F this k. Comment on the relat one effect greater than the ot went on the relative magnitudes of the substitution and income effects in this case. Was Tort greater than the other! Explain the reasoning behind your answer. and Exercise 8.21 Quasilinear Utility Peter enjoys cereal and raisins. His preference relation can be represented by the following utility function: U(Cr) = 3 log(c) + Assume that the price of a pound of cereal is 5 dollars and the price of a pound of raisins is 4 dollars. Additionally, assume that Peter has an income of 60 dollars.

please solve exercise 8.21

Answer 1

We have a u (6, 7) = Blog (C) +r. Price of a pound of cereal (C) : Pe = $5. Price of a pound of raisins, (r): Pr = $4. Peter's In corne. Min. $60:- A Peter's utility maximisation problem is ginen by maximise : ule, r) = Blog (9) +h subject to; C+ Pr r =M. -) 5€ +.475 60: & from the Budget constraint, we have not 5C+48-60. ...in => ra 60 -50 kilometara Putting this value of r in the utility finition, we her: 60-56 u (c) = 5log (9) + 4 = Blogle + 15- C: is ule) = 3 Applying the first Order condition, we have: ü'CC) = 0. - - 0

- 3 = 55.C Bayern 24. is l = 2.4 porciele Putting (= 2.4, in the expression for we get no Soma FIS - $(2:4). >> p. 2.15-12 = 3:1 - in se ») =-3 pounids. Thus, Peter consumes 2:4 pounds of cereals and 3 pounds of raisins. © Following diagram represents the quasilinear e preference of Peter: Raisins Pounds 4-4-) iska AB: Budget ling. 0 Optimuat Bundle .. ICIndifference Luis - 1.c I \ cereals/Pourde).