Asked by Jessica Lapnow on Jun 06, 2024
Verified
Charlie's utility function is xAxB.The price of apples used to be $1 per unit and the price of bananas was $2 per unit.His income was $40 per day.If the price of apples increased to $1.50 and the price of bananas fell to $1.75, then in order to be able to just afford his old bundle, Charlie would have to have a daily income of
A) $23.75.
B) $47.50.
C) $96.
D) $71.25.
E) $190.
Utility Function
A mathematical representation in economics that quantifies the satisfaction or happiness an individual gains from consuming various bundles of goods and services.
- Acquire insight into the critical role utility functions play in the decision-making process of consumers.
Verified Answer
LM
Leann McaulayJun 07, 2024
Final Answer :
B
Explanation :
Charlie's initial expenditure on apples and bananas can be calculated using the initial prices and quantities (assuming he buys x units of apples and y units of bananas). With the price change, to afford the same quantities, his expenditure would change. The correct income to just afford his old bundle can be calculated by adjusting his income according to the new prices, maintaining the same quantity of goods. Given the prices and income change, option B correctly reflects the adjusted income needed to afford the old bundle at the new prices.
Learning Objectives
- Acquire insight into the critical role utility functions play in the decision-making process of consumers.