Question

1.

Suppose Betty likes to consume cheese and biscuits, consuming 3 ounces of cheese(C) per every 2 biscuits(B). What is the utility function that best illustrates Betty’s preferences? a) U(C, B) = min{ C 2 , B 3 } b) U(C, B) = min{ 2C 3 , B} c) U(C, B) = min{C, B 2 } d) U(C, B) = min{ C 2 , B}

2.

A consumer buys food (F) and shelter (S). If the consumer’s income doubles and there is no change in the prices of F or S, the marginal rate of transformation of F for S will a) double. b) decrease by half. c) stay the same. d) increase, but not double

Answer 1

Answer 1: This is a case of perfect complements where the two goods are demanded in a fixed proportion. Since Becky consumes 3 ounces of cheese for every 2 biscuits, the utility function which represents her preferences is given as:

U (C,B) = Min (3C, 2B)

As a result in equilibrium, 3C=2B.

Answer 2: The correct answer is that Marginal rate of transformation will remain the same. This happens because with the doubling of income and price for both the goods remaining bthe same the amount of good Y ( here shelter) that the consumer needs to give up for an additional unit of food remains same. Also, when the price ratio doesn't change the only change that will happen is the outward shift of budget line with the slope of the budget line remaining the same as before, so Marginal rate of transformation doesn't change until the slope of the budget line changes which actually depends upon the price ratio.