Homework answers / question archive / Economics, Finance and Entrepreneurship Department BS2250 Intermediate Microeconomics Guided study sheet 2* (Assessed) You have to submit your answers to the questions on this guide study sheet as part of the assessment for this module

Economics, Finance and Entrepreneurship Department BS2250 Intermediate Microeconomics Guided study sheet 2* (Assessed) You have to submit your answers to the questions on this guide study sheet as part of the assessment for this module

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Economics, Finance and Entrepreneurship Department

BS2250 Intermediate Microeconomics

Guided study sheet 2* (Assessed)

You have to submit your answers to the questions on this guide study sheet as part of the assessment for this module. Ail diagrams must be hand drawn and scanned into the answers. i will not mark any diagrams cut and paste from a website.

Answers needs to be submitted via the Tumitin link on the Blackboard page.

Questions

1. Assume that Adam's utility from consuming good X and good Y is given by the following function:

U = 2X^0.1 Y^0.9

Where X is the quantity of good X while Y is the quantity of good Y.

Assume the price of X (Px) is £5, the price of Y (Py) is £25 and he has a budget of £500 to spend on the two goods.

a. Using the Lagrangian multiplier, calculate the quantities of good X and good Y he should purchase to maximise his utility.

b. How much utility does he receive at his optimal consumption bundle?

c. Calculate l at the optimal consumption bundle and provide an explanation of its value.

d. Using your previous answers, sketch the budget constraint and indifference curve at the optimum consumption point. Clearly explain and label (i) the quantities of X and Y (ii) the intercepts of the budget constraint (iii) the slope of the budget constraint and (iv) the level of utility.

2. Using one diagram, illustrate and explain the income and substitution effects of a price decrease of an inferior good (non-giffen) using both the Hicksian and Slutsky decomposition.

3. Using the Hicksian decomposition, illustrate the substitution and income effects of a price increase of an inferior good where the income effect is larger than the substitution effect. Derive the individual consumer's demand curve from this diagram and comment on the result.