Homework answers / question archive / Economics, Finance and Entrepreneurship Department BS2250 Intermediate Microeconomics 2021-22 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 2021-22 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

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Economics, Finance and Entrepreneurship Department

BS2250 Intermediate Microeconomics

2021-22

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. All diagrams must be hand drawn and scanned

into the answers. I will not mark any diagrams cut and paste from a website.

The deadline to submit your answers is Midday Tuesday 19th October 2021.

Answers needs to be submitted via the Turnitin 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 = 2X0.1Y0.9

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 ? 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.

4. To what extent do the research findings in Jensen and Miller (2008) support

the existence of real world Giffen behaviour? Refer to the price elasticity of

demand estimates in your answer. (Maximum 400 words)

5. Explain how the concept of salience from behavioural economics is a possible

limitation of the standard economic theory of consumer choice. Refer to the

paper by Chetty, Looney and Koft (2009) in your answer – See Perloff section

3.5. (Maximum 400 words)