Your family is considering a vacation in either Florida or North Carolina. The t

Question

Your family is considering a vacation in either Florida or North Carolina. The total price was $500 for either destination. However, a sale has lowered the total cost of going to North Carolina to $400. Based on this, which of the following is true?

In fact, neither effect is applicable.

Suppose you are eating brownies as you take this quiz, and you find that the marginal utility of the next piece is zero. This means that

Suppose that the price of Colby jack cheese is $4 per pound, and the price of Swiss cheese is $6 per pound. If the person gets 30 utils from the last pound of Swiss cheese they consume, how many utils would they have to get from the last pound of Colby jack cheese in order to be in consumer equilibrium?

4

Clear answers to all three questions please, thanks!

Explanation / Answer

(1) Due to lowering of price of going to north carolina, the real income of the family increases so there is a real income effect. At the same time because the price of going to north carolina is lower compared to Florida that means going to north carolina is now relatively cheaper so there is also a substitution effect. Thus the correct answer is option (c).

(2) Marginal utility is the first derivative of the total utility function. Utility functions are assumed to be quasi concave. So if the marginal utility is zero which means the first derivative of total utility is zero and this is the first order condition of utility maximization. Thus, it means that you have achieved the highest total utility possible.

(3) For consumer to be in equilibrium, the ratio of utility from consumption of last of the good to its price should be same for all goods. That is, MU1/P1=MU2/P2.

Here Marginal utility from the last pound of Swiss cheese is 30 utils. price of Colby jack cheese is $4 per pound, and the price of Swiss cheese is $6 So for consumer to be in equilibrium, the following should be satisfied

30/6=MU from jack colby cheese/4

Thus utility to be derived from last unit of jack colby cheese is= 4*30/6=20.

Thus correct option is (c)

Hope this helps. If you need further clarification feel free to ask in the comment section and please do rate the answer.

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