Problem on Marginal utility

Question:

Ambrose consumes two goods, peanuts (x1 ) and a composite good (x2). He has a utility function U = 4 x1 + x2. This means his MU1 = 2/ x1 and his MU2 = 1 . The current prices are p1 = 0.5 per kilogram and. p2 = 1. His budget is $20 per month.

(a) Write down Ambrose’s budget constraint?

(b) What are the optimal quantities of peanuts and x2 for Ambrose to consume? How much utility will he get?

(c) Suppose that rationing by the government means that Ambrose is allowed to purchase no more that 12 kilograms of peanuts per month. Now how much x1 and x2 will Morgan consume? Show the effect of rationing using a diagram. Be sure to label you diagram completely.

(d) Suppose that instead of rationing peanuts the government decides to tax them. The tax is $0.5 per kilogram. How much x1 and x2 will Morgan consume? How much utility will he get?

(e) How much would Ambrose need to be compensated to make him as well of as if peanuts had not been taxed? 

Download Full Solution

Comments

  • HWA
    Rasha

    this is a very good website

  • HWA
    maani

    I have 50 questions for the same test your page is showing only 28

  • HWA
    joeanne

    hi can you please help or guide me to answer my assignments. thanks

  • HWA
    joeanne

    hi can anyone help or guide me to my assignments. thanks

  • HWA
    Monik


  • HWA
    Cristina

    This solution is perfect ...thanks

  • HWA
    Janete

    Hello Allison,I love the 2nd image that you did! I also, had never heard of SumoPaint, is something that I will have to exolpre a bit! I understand completely the 52 (or so) youtube videos that you probably watched. Sometimes they have what you want, sometimes they don't! However, it is always satisfying when you are able to produce something that you have taught yourself. Great job!Debra 0 likes

  • HWA
    Sandeep

    Perfect bank of solution. 

  • HWA
    Oxana

    great !

  • HWA
    Paul Brandon-Fritzius

    thanks for the quick response. the solution looks good. :)

  • HWA
    tina Johnson

    thnx for the answer. it was perfect. just the way i wanted it. 

  • HWA
    Giuseppe

    works fine.