71 % (732 Review)

Diane spends her weekly allowance of $200 on good X and good Y; her utility function is given by:U = 15 XY

When the price of X is $5 and the price of Y is $10, Diane consumes 20X and 10Y.

(a) Show that at Dianeâ€™s equilibrium the ratio of the marginal utility of the two goods equals their price ratio.

(b) By how much would Dianeâ€™s utility change if her allowance were reduced by $1.50?

(c) Solve for Dianeâ€™s optimal purchases of X and Y if the price of Y is reduced, through a price subsidy, to $5.

(d) What would be the cost of this price subsidy to the government?

(e) How much of a cash subsidy Diane would have to be offered instead of a price subsidy to be as happy as she was

initially

When the price of X is $5 and the price of Y is $10, Diane consumes 20X and 10Y.

(a) Show that at Dianeâ€™s equilibrium the ratio of the marginal utility of the two goods equals their price ratio.

(b) By how much would Dianeâ€™s utility change if her allowance were reduced by $1.50?

(c) Solve for Dianeâ€™s optimal purchases of X and Y if the price of Y is reduced, through a price subsidy, to $5.

(d) What would be the cost of this price subsidy to the government?

(e) How much of a cash subsidy Diane would have to be offered instead of a price subsidy to be as happy as she was

initially

Just **$7.00/month**

Get immediate access to 24/7 Homework Help, step-by-step solutions, instant homework answer to over 40 million Textbook solution and Q/A

Pay $7.00/month for Better Grades