Question

5. By providing an appropriate example, briefly discuss the conditions of utility maximization 6. Due to economic crises average income decrease by 10%.Given the decrease in income by 10%, the demand for meat decrease by 10%. a) What is the income elasticity for meat? b) Is meat a normal good or an inferior good? Why? 7. Suppose that at a given level of satisfaction the marginal rate of substitution of product Y for product X is constant. What does this imply about the relevant indifference curve? What type of relationship is implied for product X and Y?

Answer 1

Conditors for utility maximization I with a single product total utility is maximised when the marginal uttlity from the next unit consumed i | Jew. Cassuming that the budget of the consumer allous this point to be readed TMU =P - When two goods a more than two goods au comuned, the condition for maximising wility is that a consumer - equalises the marginal utility pee money unit spent ie - Mun:- MUBMum 1 PB (meginal wility of up ) foreg MU ($) PC) TU Culls) - Utility is -- matferuuget at 6 units of good consumed.

Q06 - Average income decreases by loy The demand for meat decrease by 10% (a) Income elasticity for meat = of change in aty % chlage in income = 6 10 = 1 - 10 (b) Good is a normal good because there is a positive income effect ie with the W in income there is a v in glantity demanded . Therefou, good is a NORMAL good- • MRSx is constant MRS refus to marginal rate of substitution on the amount of our good that is substitutable for another MRS is also known as slope of indifference are Sinu , MR syx is constant ie there is equal amount increases in good X and decrease in good y Il given we are increasing good a consumption)

MRST da = dy MUY MUX is AMRS is constant which means ic straight T IC ( straight line 1C) ___ Goodt d y are perfect substitutes. Goods &