Question

Question 3: After winning the lottery, Australian Artie decides to retire, stay home, and watch sports on television all day. Artie likes both Rugby, R, and Aussie Rules Football, F and views them as imperfect substitutes. In particular, Artie’s preferences can be represented by the following utility function: U = R 0.4F 0.6. Since Artie is rich, the only cost of watching F is the opportunity cost of not watching R: one hour of R necessarily means one hour less of F. In other words, even though Artie is rich, there is still a price on his time.

(a) What is Artie’s marginal rate of substitution between R and F, MRSRF? Interpret it.

(b) What is the price ratio, pR/pF? Interpret it.

(c) Suppose Artie chooses some bundle, (R, F). If this bundle maximizes Artie’s utility, what relationship must hold between R and F?

(d) Define MUR pR . What is the interpretation of this? If Artie is maximizing his utility, what must MUR pR be equal to?

(e) Suppose there are 24 hours in a day. What bundle (R, F) will Artie consume? [Now you should find actual numbers.]

Answer 1

Using definition & conditions of consumer market equilibrium