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Suppose Larry's Engel curve of fried chicken is increasing at low income level and decreasing at high income level
Suppose Larry's Engel curve of fried chicken is increasing at low income level and decreasing at high income level. When Larry has a low income level, i.e., when Larry's Engel curve is upward-sloping, he views fried chicken as a normal good a Giffen good a complement an inferior good a substitute
Nancy's marginal rate of substitution is given by MRSxy=y/x. If she has income =$100, Px=$5, and Py=$10, what is her consumption of Good Y in the utility maximization market basket? Notice that the preference is smooth and the utility maximization solution is interior. 100 10 50
Expert Solution
Q1) The answer is (a) normal good as Engel curve represents a relationship between total expenditure on a particular goo and income and a positive association implies that the income elasticity of demand is positive and thus the good is a normal good.
Q2) The optimal point occurs when:
MRS xy = Px/Py
=> y/x = 5/10
=> x = 2y
Putting this in the budget constraint we get,
5*2y + 10*y = 100
=> 20y = 100
=> y = 5
Thus, the answer is (b) 5
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