1.
Suppose that Bridget and Erin spend their incomes on two goods, food (F) and clothing (C). Bridget’s preferences are represented by the utility function U(F,C)=10FC, while Erin’s preferences are represented by the utility function U(F,C) = 20 * F2 * C2 . Food price is $10 per unit and Clothing price is $15 per unit. Income is $1000 for both of them.
Find optimal choices of food and clothing for Erin and Bridget. No need to draw a curve.
From optimal choice, imagine Erin and Bridget have to decrease consumption of clothing. Who would be more upset? In other words, who would be giving up more in terms of utility? Remember, income is still constant
- Imagine there is a trust like in example 3.5 in the textbook. Trust would be given to you only for your tuition fee and potential income growth. Requirements are as follows: I. Your income should reach $35,000 to be awarded the trust. II. Your tuition will be free (Price of college becomes P=0) if used. Otherwise, you have to pay a tuition fee P= $ 20,000 To make your income grow you can choose to work overtime and get $35 000 in income. Otherwise you may choose to work less and enjoy more leisure. In this case you receive $30 000 as income. Other items cost $ 1,000 per unit. You will work hard if you want to get awarded the trust. a) Draw a budget line in case of not awarded and awarded. Pay attention to how the budget line changes due to price change in college tuition. b) Find your optimal consumption choice. [need to draw an indifference curve. Use a hypothetical indifference curve with three cases: corner solutions and middle solution.]
this is picture
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