Question

8. Fats Dominio's preferences over food expenditures, (f) and expenditures on other goods (9) can be represented by the utility function: with Slim Picken's preferences can be represented by the utility function: with Each has income of only $100.00 per month: the competition from the pop idols and hip hop has really hurt sales. Prices are PP9 1. a) What are the optimal expenditures on food and other goods for both Fats and Slim? b) On ONE diagram draw the budget line for both Fats and Slim. Indicate the optimal consumption bundle for Fats and for Slim. Make it big and read below for what else will be on it! c) Since a measly hundred bucks a month can hardly keep Fats and Slim in the style to which they have become accustomed, the Government decides to give each $50.00 worth of food stamps. One dollar worth of food stamps can be redeemed for one dollar of food. What is the new budget set for Fats and Slim? Show it on your diagram (d) What is the optimal point under the Food Stamp program for Fats? For Slim? Would either prefer $50.00 in cash rather than $50.00 worth of food stamps? Indicate the optimal point on your diagram and include the indifference curves that the optimal points lie on. e) At the optimal food stamp choices, what are both Slim and Fats' MRSaf? Is the food stamp program Pareto Optimal? Can you infer anything about the potential for a black market? WHY? Who will sell what to whom? What is the minimum price of food stamps? The maximum?

Answer 1

a) for optimization mu RS_g f = P_g/P_f = > 3 g/f = 1/1 = > 3g = f. g + f = 100 = > g + 3 g = 100 = > 25, f = 75 [FAT] g = 3 g and g + g = 100 = > g = 75 b = 25 [] b) c) 50 $ worth of food means extra 50 $ income Because Force is 1 $ and 50$ given quaintly of food is 50 [of (ABC)]. New budget lens is CC' Thus both consumers will new measuring accordingly and would bad to an increase in consumption of both commodes been though only food is given d) Since food stamps cannot be used to after goods BC region cannot be used for communing other goods Thus ABC' new BC FAT g + f = 150, g + 3 g = 150 g = 37.5 f = 112.5 SLIM g + f