Question

d

See Hint Let x1 represent a typical good (i.e., consumers prefer more of good x1 to less). Let x2 represent a second good in a two-good world. Both goods have continuous indifference curves and income, m, is greater than $0. Under which of the following situations would consumers spend all of their income on just x1? Choose one or more: A. X1 and x2 are perfect complements. B. The consumer has Cobb-Douglas preferences, and p2 > pi. C. xi and x2 are perfect substitutes at a 1-to-1 ratio, and p2 > pl. D. x2 is a bad, meaning less is preferred to more. E. x2 is a neutral good.

Answer 1

Date II Soubion A consumer would spend all their income on lust a 4 . 1 & 22 are perfect substitutes in a to i ratis and P2 >Pi. Or neu abad good meaning less is preferred tomone Aus ic. & BD there of the utility function is given by: (Conesponding to co U = , +32 MR SX0M2 = MUIX al MU12) MRS → marqual rate of Substitution between 2, & u2 Mus marginal Utility of the good Price ralis - P2 SP, . Pi<1 P2 At optinum : MRSA, 2 > Pi l e P In the consumer will only consume ni. His budget Constrount is ; Pă + P2 H2 = Adm at op tinum H2=0 P2 x = Hence here consumer will spend all their income on al Alternatively y the goodis too (22) is bad the consumer Lerides negalite utility from ito Consumption .. At the utility maninuzing point the consumer will not purchase any of that good. In a 2 good world the consumer will spend all he Income on a * 22=0. Ics Anshned rotato C&D