Question

In: Economics

Anna spends her income on green goods (G) and brown goods (B). Initially, Anna's income is...

Anna spends her income on green goods (G) and brown goods (B). Initially, Anna's income is $30, the price of green goods is $2, and the price of brown goods is $1. The government introduces a new regulation that increases the price of brown goods to $5.  

Her utility function is as before: U(G,B) = G^2B

Her marginal utility for green goods is: MUg = 2GB

Her marginal utility for brown goods is: MUg = G^2

a) Given the initial prices, Anna's optimal consumption consists of ___?__ units of green goods and _?__ units of brown goods. The level of utility that Anna obtains from consuming this basket is __?__ .

b) After the new policy is implemented, Anna's optimal consumption consists of __?__ units of green goods and __?__ units of brown goods. The level of utility that Anna derives from consuming this basket is  __?__.

c)Write down the equations that you need to decompose the total effect of the price change into income and substitution effects. [Hint: there should be three equations, one for the utility level, a tangency condition, and a budget condition]

d)Rounded to the closest integer, the decomposition basket consists of  __?__ units of green goods and  units of brown goods.

e) Fill in the blanks. Rounded to the closest integer, the magnitude of the substitution effect of the policy over Anna's consumption of brown goods consists of __?__ units, while the magnitude of the income effect consists of __?__ units.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago
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