) A person’s utility function is U = 50F0.8B0.6 for goods F and B with prices...

) A person’s utility function is U = 50F^0.8B^0.6 for goods F and B with prices P_F = $4 and P_B = $1 and income Y = $140. Marginal utilities of F and B are:

MU_F = 40F^-0.2B^0.6 and MU_B = 30F^0.8B^-0.4

Graph the budget constraint (with F on the horizontal axis, B on vertical axis.) Document the intercepts (numerically) and slope of constraint.
Calculate the utility-maximizing choices of F and B. Show on your graph.
P_F decreases to $2. Find the new utility-maximizing amount of F; show graphically.
Plot out the demand curve for F.
Explain why we interpret the demand curve as a marginal value/benefit (i.e., explain the connection between the demand curve and utility maximizing choices in parts b and c.)
This part is a little tricky: Suppose that this person is given a gift card worth $20 that can only be used to purchase (i.e., it can’t be used to purchase any B). Show how this changes the budget constraint (use price P_F = $2 and P_B = $1.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

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