Question
In: Economics
Jessica spends all her money on bags(B) and shoes(S). Her utility function is U(B,S) = 2...
Jessica spends all her money on bags(B) and shoes(S). Her utility function is U(B,S) = 2 * B^0.5 * S^0.5 . Her income is 150$. Price of shoes is Ps = 2. Price of bags depends on the number of bags purchased. Bags cost $5 each if she purchases between 1 and 8 bags. If she purchases more than 8 bags, the price falls to $2 for all subsequent bags.
a) Draw Jessica's budget constraint where bag is on the horizontal axis.
b) Solve Jessica's optimal bundle.
c) Suppose Jessica's utility function U(B,S) = 0.5 * ln(B) + 0.5 * ln(S). What is her optimal bundle?( Hint: Compare the MRS for both utility functions)
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
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Cleopatra spends all her money on bags (B) and shoes (S). Her
utility function is U(B, S) = 2B0.5S
0.5
. Her income is
$150. Price of shoes is pS = 2. Price of bags depends on the number
of bags purchased. Bags cost $5 each if she purchases
between 1 and 8 bags. If she purchases more than 8 bags, the price
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Cleopatra spends all her money on bags (B) and shoes (S). Her
utility function is U(B, S) = 2B^0.5S^0.5 . Her income is $150.
Price of shoes is pS = 2. Price of bags depends on the number of
bags purchased. Bags cost $5 each if she purchases between 1 and 8
bags. If she purchases more than 8 bags, the price falls to $2 for
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decision making can be modeled by assuming that she maximizes her
expected utility. Her current wealth is 100. (All quantities are in
hundreds of dollars.)
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(the "good outcome") or loses 1 (the "bad outcome"). She can buy as
many units as she wishes. For example, if she buys 5 units, she...
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(d)...
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