--%>
Assignment Help - homework help

Demand curve for peanuts

Question:

a) Johnny consumes peanuts (x1) and a composite good (x2). His utility function is U = x1x2. His marginal utilities are MU1 = x2 and MU2 = x1. Johnny's budget is $20 and the price of the composite good is $1. Derive Johnny's demand function for peanuts.

b) Ambrose consumes peanuts (x1) and a composite good (x2).He has a utility functionU = 4 x1 + x2. This means his MU1 = 2/√x1 and his MU2 = 1 . The price of the composite good is p2 = 1. His budget is $20 per month. Derive Ambrose's demand function for peanuts. How does it compare with Johnny's demand curve for peanuts?

Solution:

a) U = x1x2

MRS = MU1/MU2 = x2/x1

Now, MRS = P1/P2 = P/1 = x2/x1 => x2 = 2Px1 {taking P1 = P}

Putting this value in budget equation:

Px1 + x2 = 20

  1.   Px1 + 2Px1 = 30
  2.   Px1 = 10
  3.   x1 = 10/P
  4.   x2 = 20

b) U = 4 Öx1 + x2.

MRS = MU1/ MU2 = (2/Öx1)/1 = 2/Öx1

Now, MRS = P1/P2 = P/1 = 2/Öx1

  1.   Öx1=2/P
  2.   x1 = 4/P2

Therefore, Ambrose's demand for peanuts does not depend upon his income, while Johnny's demand for peanuts does depend upon his income.

   Related Questions in Microeconomics

  • Q : Income and Substitution effects problem

    Economists decompose how the consumers react to a change in price of a good into the: (1) Diminishing marginal utility effect and indifference effect. (2) Indifference effect and enhancement effect. (3) Net utility effect and preference effect. (4) Income effect and s

    		•
  • Q : Greatest total revenue at price In the

    In the demonstrated figure, total revenue is greatest for cheesy fried grits of Pixie at a price of as: (w) P1. (x) P2. (y) P3. (z) P4.

    Q : Sufficient general theory of oligopoly

    A sufficient general theory of oligopoly would: (w) merely blend elements from competitive and monopolistic models. (x) qualitatively account for interdependence in decision making in broad terms. (y) closely fit all types of oligopoly markets. (z) de

    		•
  • Q : Unlimited liability in a partnership

    The word ‘unlimited liability’ in the partnership signifies that a partner: (1) Pays to begin to the partnership, however can’t be held liable for additional/extra funds. (2) Can be held personally accountable for any and each of the partnership&rsqu

    		•
  • Q : Help For a monopsonist in the labor

    For a monopsonist in the labor market, the marginal resource cost of labor is:

    		•
  • Q : Average cost per unit of production

    When Prohibition Corporation maximizes profit within its production of St. Valentine’s Day software, there average cost per unit of it produced will be roughly: (i) $4 per copy. (ii) $10 per copy. (iii) $18 per copy. (iv) $24 per copy. (v) $32 per copy.

  • Q : London Olympics-how will the economy be

    ‘Describe the influence of London Olympics on economy?’

    		•
  • Q : Problem Regarding to Contestable Markets

    Even though the concentration ratio for an oligopoly is close to hundred, firms may operate rather efficiently when the market: (1) price conforms to a limit pricing model. (2) is contestable since entry and exit are easy. (3) demand curve is unitaril

    		•
  • Q : Examples of pairs of substitutes goods

    Illustrations of pairs of goods which are close substitutes comprise: (i) Bow ties and tuxedoes. (ii) Glasses and contact lenses. (iii) Power boats and water skis. (iv) Baby food and diapers. (v) Camping trailers and large SUVs.

    Q : Normative Standards for Distribution

    Relative to a requirements standard for distributing income, in that case the adoption of an equality standard would most likely tend to be: (w) unarguably fairer. (x) less bureaucratic. (y) more harmful to work incentives. (z) clearly less fair.

    		•