Question

11 Question (17 points) See page 149 Arlo is very health-conscious and consumes only two goods, rice cakes and quinoa. His utility function is uír,q) = req, where r is the number of packs of rice cakes he consumes and q is ounces of quinoa. The price of a pack of rice cakes is $4, and the price of an ounce of quinoa is $8. Arlo has $720 to spend this week on these two goods. Suppose that the price of quinoa suddenly falls to $4. 1st attempt Part 1 (2 points) See Hint Before the price charge. Arlo consumed packs of rice cakes and Ounces of quinoa per week. Part 2 (3 points) See Hint after the price change, Arlo's income had changed so that he could exactly afford his old consumption bundle, his new Income would have been With this income and the new prices, Arlo would consume packs of rice cakes and Ounces of quinoa Part 3 (2 points) See Hint How many Des the substitution effect of the fall in the price of quinoa make Arlo buy more quinoa or less quinoa? ounces more quinoa or less quinoa? < 11/ 13 DOF 11 QUESTIONS COMPLETED

Answer 1

lo 24 sr,q) = req Per=4 Pq = 8 Inome = 20 At aptiniality MRS = noon ay h a ha = 3 = £ fer-4 Budget 46 +89 = 720 169+89 - 790 a= 720 30 4 na120 recicake = 1204 quins a 530 New income - 1no (4) +2014) = 480 +120 - 600 his new encome – 600 wornew income, Again op finality ara- 29 4 8=29) Budget to 4r+49 =600 12q = 600 (q=5 46e=100] with new income, Arlo will consume 100 packs of nice cakes & so dunces of quinoa. Due to substitution effect more quinoa will be consumed & finq=20 units , реши су на ск.) Budget 44+ 4q=720 12q=770 (q=60 / 4tr = 120] Arlo buy 120 packs of rice cakes 4 60 ounces of quinoa Income effect increases quines by locenits Due to substituto @