Consider an individual that can consume 2 goods: x and y. The price of good x is
ID: 1142328 • Letter: C
Question
Consider an individual that can consume 2 goods: x and y. The price of good x is px and the price of good y is py. The individual faces a budget constraint of I (or income).
C) Suppose px = 10 amd py =15. What is the opportunity cost of consuming 1 unit of good x? What is the opportunity cost of consuming 1 unit of good y?
E) Suppose you know the following about the individual’s preferences:
(1, 12) ~ (4, 3) (4, 6) ~ (3, 8) (1, 18) ~ (3, 6)
Construct the individual’s preference ordering. Explain what assumptions you areusing (when imposed).
F) Check whether the function U = xy, can reflect the preferences found in E).
G) If U = xy reflects the preferences found in part E), does U = 271,589(xy)3 also reflect the preferences? How do you know?
Explanation / Answer
c) opportunity cost of consuming 1 unit of good x means to leave a unit of y to consume x, hence opportunity cost would be 5 but in favour of the consumer.
opportunity cost of consuming 1 unit of good y means to leave a unit of x to consume y, hence opportunity cost would be 5 but against the consumer.
e) individual’s preferences depend upon the preference function, let us assume it is to be= x+y
Then putting (1, 12) ~ (4, 3) (4, 6) ~ (3, 8) (1, 18) ~ (3, 6), individual prefernecs would be= 13,7,10,11,19,9 and ordering would be= (1, 18) , (1, 12), (3, 8), (4, 6), (3, 6), (4, 3)
f) function U = xy, then the individual prefernecs would be= 12,12,24,24,18,18 and ordering would be = (3, 8)~(4, 6), (1, 18) ~ (3, 6), (1, 12) ~ (4, 3)
These are not the ones found in e) due to the differences in the function. As the function changes, the preferences change.
g) U = 271,589(xy)3 would find the same preferences due to the proportionate nature with the earlier function of U=xy