Question

Please Answer all the questions

Thank you

1. Suppose Bill can buy two goods, xylophones (X) and yogurt (Y). The utility he gains from these goods is shown in the table below.

# of Units	MUx	MUY
1	10	5
2	8	4
3	4	3
4	2	2
5	1	1

1. If the price of xylophones is $2 per unit and the price of yogurt is $3 per unit, how many xylophones and yogurts will this consumer purchase, given an income of $17?
2. If the price of Y rises to $4.50 per unit, how much of X and Y will this consumer purchase, given an income of $17?

2. Suppose you decide to start your own business. You quit a job at which you earned $38,000 per year and invest $20,000 of your own money (which had been earning 10% in a mutual fund). You incur raw materials costs of $23,000. After 1 year you earn revenues of $23,000 at your new business. You decide to go back to your old job, and you sell your business for $20,000. A friend tells you "Hey, you broke even-- you got your money back when you sold the business." So, what do you think? What is the profit on your 1-year business venture? (Assume no other input costs, and be sure to count the sale of your business as income.)

Answer 1

Answer 1:

# of units	MUX	MUX/$2	MUY	MUY/$3	MUY/$4.5
1	10	5	5	5/3=1.67	5/4.5=1.11
2	8	4	4	4/3=1.33	4/4.5=0.89
3	4	2	3	3/3=1	3/4.5=0.67
4	2	1	2	2/3=0.67	2/4.5=0.44
5	1	0.5	1	1/3=0.33	1/4.5=0.22

a.

At income=$17, Bill will consume both goods at a level where MU_X/P_X=MU_Y/P_Y.

If Bill consumes 4 unit of X and 3 unit of Y it will get maximum utility.

b.

If price of Y increased to $4.5 then Bill will consume 4 units of X and only 2 units of Y (now he cannot afford 3 units of Y and X is giving it more marginal utility than Y) at income of $17.

Answer 2:

Cost of starting business(including opportunity cost)=$38,000+$20,000+$2,000(earnings from mutual fund 10% of 20,000)+$23000(raw material costs=$83,000.

Revenues during business=$23000 and sale price of business=$20000.Total income=$43,000.

At break even cost should be equal to income, so profit should be $40,000 ($83,000-$43000) to break even.