Question

Given a budget constraint and an indifference curve, how do you
determine what the optimal consumption bundle is?

Answer #1

A Budget constraint shows a consumer can purchase and an indifference curve(IC) shows the combination of two goods that gives equal satisfaction. So optimal consumption bundle that gives maximum utility is the point where the IC is tangent to the budget line.

*The below grapgh shows a bundle
of (7,2) & units of good x and 2 units of good y is the optimal
consumption bundle, the point where IC curve is tangent to the
budget line.*

Describe the scenario where a person's budget constraint is
tangent to their indifference curve. Explain what is happening at
this point of tangency.

Suppose a person's budget constraint is tangent to their
indifference curve. If that person’s income increases and there is
no change in the price of two goods, what will happen?

3) Drawing the budget constraint in the Optimal Choice Model for
consumption over time.
a) Suppose Abbie’s income (endowment) is all in the future (later)
and equals $1,000. Draw the budget constraint showing the possible
combinations of consumption now and consumption later if the
interest rate equals 10% and if the interest rate equals 20%. What
happens to the budget constraint and Abbie’s opportunity to consume
now and later if the interest rate increases?
b) Suppose Bala’s income (endowment) is...

1. A consumer has the utility function U = min(2X, 5Y ). The
budget constraint isPXX+PYY =I.
(a) Given the consumer’s utility function, how does the consumer
view these two goods? In other words, are they perfect substitutes,
perfect complements, or are somewhat substitutable? (2 points)
(b) Solve for the consumer’s demand functions, X∗ and Y ∗. (5
points)
(c) Assume PX = 3, PY = 2, and I = 200. What is the consumer’s
optimal bundle?
(2 points)
2....

1. Show a consumer’s budget constraint and indifference curves
for soda drinks and slices of pizza. Show the optimal consumption
choice. If the price of soda drinks is $1.50 per can and the price
of a slice of pizza is $2 per slice, what is the marginal rate of
substitution at the optimum?
2. Suppose the income elasticity of demand for food is 0.5 and
the price elasticity of demand is −0.25. Suppose also that Mia
spends $10,000 a year...

1. Show a consumer’s budget constraint and indifference curves
for soda drinks and slices of pizza. Show the optimal consumption
choice. If the price of soda drinks is $1.50 per can and the price
of a slice of pizza is $2 per slice, what is the marginal rate of
substitution at the optimum?
2. Suppose the income elasticity of demand for food is 0.5 and
the price elasticity of demand is −0.25. Suppose also that Mia
spends $10,000 a year...

11.he indifference curve that is tangent to the budget
constraint on the Budget Constraint model shows the quantity of the
two goods that the consumer would maximize utility from their
consumption.
A.True.
B.False.
12.Susan, a student, budgets $20.00 for lunch for the week.
Susan can buy 4 burger meals if she buys zero taco meals. What is
the price of a burger meal for Susan?
A. $1.00
B. $2.00
C. $3.00
D. $4.00
E. $5.00
13. To determine the utility...

Question 1
The following are key characteristics of Indifference Curves,
EXCEPT:
A. Each indifference curve identifies the combinations of X and
Y where the consumer is equaly happy.
B. Indifference curves are convex to the origin because X and Y
are assumed to be close substitutes.
C. For any combination of X and Y there is one and only one
Indifference Curve.
D. Indifference curves cannot logically cross between them if
preferences are well defined.
Question 2
The following are...

Tom has preferences over consumption and leisure of the
following form: U = ln(c1)+ 2 ln(l)+βln(c2), where ct denotes the
stream of consumption in period t and l, hours of leisure. He can
choose to work only when he is young. If he works an hour, he can
earn 10 dollars (he can work up to 100 hours). He can also use
savings to smooth consumption over time, and if he saves, he will
earn an interest rate of 10%...

7.
Suppose you have the following utility function for two
goods:
u(x1, x2) = x
1/3
1 x
2/3
2
. Suppose your initial income is I, and prices are p1 and
p2.
(a) Suppose I = 400, p1 = 2.5, and p2 = 5. Solve for the
optimal bundle. Graph the budget
constraint with x1 on the horizontal axis, and the
indifference curve for that bundle.
Label all relevant points
(b) Suppose I = 600, p1 = 2.5, and...

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