What is the marginal utility of good Y? Suppose Jane has an income of $800. The price of good X is $10 and the price of good Y is $20.
e. As Jane moves down an indifference curve, what happens to the marginal utility of good X (increase, decrease – assume good X is on the horizontal axis). What happens to the marginal rate of substitution?
f. Suppose Jane’s utility is given by U = X + Y. How many units of the X good will she purchase? How many units of the Y good?
g. Suppose Jane’s utility is given by U = Min(X, Y). How many units of the X and Y good will she buy?
h. Suppose Jane’s utility is given by U = XY, where MUX = Y, and MUY = X. How many of the X and Y goods will she buy?
i. What is Jane’s total utility in part h? What is the marginal utility of each good?
j. Suppose the manufacturer of the X good gives a volume discount, so that the price of X is $5 after the consumer has consumed 30 units. Sketch the budget line, showing both intercepts.
k. Suppose the manufacturer of X offers consumers the opportunity to join a “savings club”. Club membership costs $80 but club members are able to purchase the X good for $8. Sketch the budget line, showing both intercepts.