Question

Joy has utility function ?(?, ?) and she is currently spending all of her income on positive (non-zero) amounts of goods ? and ?. ?? = 12 and ?? = 10. At Joy’s current consumption bundle ??(?,?) ?? = 21 and ??(?,?) ?? = 7.

2a. Use indifference curves and budget constraints to illustrate Joy’s current situation. Calculate all slopes and show them in your diagram.

2b. Assume that one unit of ? is a small amount. How much ? is Joy willing to give up to obtain one more unit of ? ? How much ? does Joy have to give up (in the marketplace) to obtain one more unit of ? ? Is Joy better or worse off if she gives up ? to obtain one more unit of ? ? How much? So what should Joy do ?

2c. There is not enough information for you to calculate Joys optimal bundle, but you should show it on your diagram (for 2a) with budget constraints and indifference curves. If Joy is at her optimal bundle, how much ? is she willing to give up to obtain one more unit of ? ?

2d. Starting from her current consumption bundle, calculate Joy’s marginal utility of income if: • she spends one more dollar of her income on ? • she spends one more dollar of her income on ? Comment on the difference between the value of dollars spent on ? versus the value of dollars spent on ? at her current consumption bundle and why she should alter her consumption bundle.

Answer 1