2. Donald has $200 price (Ps) at $25, while drinks has an universal price (Pd) a

Question

2. Donald has $200 price (Ps) at $25, while drinks has an universal price (Pd) at $10 a) Write down Donald's budget constraint. Draw the budget line. b) Write down to use on either snacks or drinks at a certain store. Snacks has an universal and draw the budget line again for the following changes: the budget constraint i. Donald's budget increased to $250 il. The price of snacks increases to $40, while Donald's budget is remained at $200 Donald's original budget ($200) and prices (Ps $25, Pd $10), what is the slope of budget line)? Donald has ranked his preferences of each unit of his consumption as follows: Total Utility from Total Utility Marginal Utility Marginal Utility from drinks Units of from snacks 1000 400 200 from Snacks 1000 1800 2500 3150 3775 4390 5000 5608 900 1500 1900 2450 2685 2900 3110 610 210D& Fill in the blanks for the table. Graph the Marginal Utility, Total Utility for each good. e) d) Rank the Marginal Utility per dollar spent on each good. Find the optimal consumption bundle (Drinks, Snacks). What is the Total Utility obtained from such optimization behavior? Assuming the IC is smooth, Draw the budget constraint, Indifference curves of 6000, 6840, 7500 utils. Now assume that the price of snacks increases to $30. Draw the new Budget constraint (assuming we can consume a partial unit of snack, for example, 1.3 snacks, 3.46 snacks, etc), derive the new optimal consumption bundle. The optimal consumption bundle brings how much utility? Graph the old and the new optimality conditions on the same picture. If the Substitution effect what is the income effect? Again assume the IC is smooth, present the Income, Substitution, and Total Effect on the graph. g) h) 0.5 (Substitution effect of price change on quantity of snacks), i Consider the snack demand for Donald. We know that when the price is $25, Donald demands 6 units of snacks. When the price is $30, Donald's quantity of Snack demanded drops to 4. Assume that Donald's Demand for snack is linear. Construct Donald's Snack Demand function (quantity demanded of Snack as a function of Price of Snack) What happens to Donald's Demand for Snacks when his budget increases from $200 to $400? ls it a change in Quantity Demanded or in Demand itself? You can present the answer analytically, no calculation is needed Calculate the Point Elasticity of Demand for snack at quantity consumed - 6 and price $25 j) k) of Demand for snack at quantity consumed 6 and price

Explanation / Answer

Units of consumption Total utility Total utility Marginal utility (MU) Marginal utility (MU) MU per $ MU per $ Drinks Snacks Drinks Snacks Drinks Snacks 1 900 1000 900 1000 90 40 2 1500 1800 600 800 60 32 3 1900 2500 400 700 40 28 4 2200 3150 300 650 30 26 5 2450 3775 250 625 25 25 6 2685 4390 235 615 23.5 24.6 7 2900 5000 215 610 21.5 24.4 8 3110 5608 210 608 21 24.32 Cost of drinks is $10 Cost of snacks is $25 Budget is $ 200 Drinks Snacks Marginal cost $ Total cost $ Total utility snacks Total utility drinks 1 0 10 10 2 0 10 20 1 10 30 1 25 55 1 25 80 1 10 90 1 25 115 1 1 35 150 1 25 175 1 25 200 6 6 2685 4390 Marginal utility per dollars of drinks (90) versus 40 for snacks. So he will buy one unit of drinks Next he will compare 40 for snacks versus 60 for drinks, he will buy another unit of drinks Next since MU is same for both and he has enough money he will buy both items Next MU for snacks is 32 and for drinks it is 30, so he will buy snacks Next MU for drinks is 30 and for snacks it is 28, so he will buy drinks Next MU for snacks is 28 and for snacks it is 25, so he will buy snacks Next MU for snacks is 26 and for drinks it is 25, so he will buy snacks Next since MU (25) is same for both and he has enough money he will buy both items Next MU of snacks (24.4) is higher than MU of drinks (23.5), so he will buy snacks. Next MU of snacks (24.6) is higher than MU of drinks (23.5), so he will buy snacks.

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