Homework Answers
Given that U = S + 10P being the utility function. Then, MRS = -MUS/MUP = -1/10 or MRS = -0.1
a) MRS is a constant value which implies that the two goods are perfect substitutes. This is because the utility
function is linear indicating that MRS is constant.
b) Now slope of budget equation is Price of S/Price of P = -1000/50 = -20
Since MRS is less than the slope of budget equation, there is a corner solution
Here, at the equilibrium, Prescription drugs are generating more utility since MUS/Price of S < MUP/Price of P.
Hence, only Prescription drugs are consumed at the equilibrium
(We are not given the budget. If we assume it to be M, then the equilibrium allocation will be (S = 0, P = M/50)
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3. For this question, want to think about the indifference curves and budget constraint as well...
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QUESTION 31 When you observe downward sloping, convex indifference curves, what do you automatically know? That the MRS in absolute value is diminishing. That the utility function is generally written as U(x,y) = ax + by, where a and b are positive constants. That the consumer views the two goods as imperfect substitutes. That the utility function is generally written as U(X,Y) = minax,by), where a and b are positive constants. That the utility function is generally written as U(X,Y)...
Question 1: Two-period model where Ci and C2 are perfect substitutes 1. Draw the budget constraint with Yi- 100, Y2 60, and 0.2 2. Draw the indifference curves for the preference that is represented by the lifetime utility function G +SC, where β-1. Do it for various levels of lifetime utility, such as 100, 150. and 200. 3. Using the budget constraint and the indifference curves, determine the optimal values of Ci and C2. Does the household have positive consumption...
QUESTION 30 When you observe downward sloping straight line indifference curves, what do you automatically know? That the MRS is constant. That the consumer views the two goods as perfect substitutes. DODO That the consumer views the two goods as imperfect substitutes. That the consumer views the two goods as perfect complements That the utility function is generally written as U(X ) = ax + by, where a and b are positive constants. That the utility function is generally written...
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