Question

Suppose Alice's utility for Vegemite and other consumption is given by U(q,c)=24 log(q +1)+c, where q is Alice's consumption of Vegemite, and c is the level of Alice's other consumption. Nor- malize the price of other consumption to land let p denote the price of Vegemite. Assume Alice's income I is larger than 24. (a) What is Alice's optimal consumption of Vegemite? [Hint: Note that Alice does have a choke price. You will need this in the next part.] (b) Suppose p 12. How much additional income would Alice need to just compensate her for the absence of Vegemite? (c) How does your answer to part 2b compare to Alice's consumer surplus when p=12? (d) Suppose there are n consumers with preferences identical to Alice. Suppose moreover that each consumer's income is greater than 24. What is the market demand for Vegemite for general p? For what value of n is market demand equal to 5 when p= 12? (e) Suppose the market for Vegemite is as described on the supply side in Question ld and on the demand side in part 2d. What price will maximize total surplus (that is consumer surplus plus profits)? [Hint: What is special about p = 12?]

Answer 1

> As more as the laboleo Supply by a workers is present that much loss will be present in lepsure. Here at present there are à determinants of the labor supply. They are substitution effect and income effect. > Here substitution effect takes place when as higher wage leads to the worker substituting leisure for work of an increase in the labor supply due to the higher wages than before. Income effect states that the worked may reach his income level which he has as a tassget by doing work for certain noo of hours And increase in the wages would mean that he can achieve of gain his targeted level of income in fewer hours. 2