Microeconomics Assignment Example | Topics and Well Written Essays - 2000 words

Microeconomics - Assignment Example1b) Marginal rate of substitution of food for water is the quantity of water a consumer is willing to give up to ware one additional quantity of food, keeping the level of utility unchanged. MRSw,f = MUw/MUf where MUw is borderline utility of water and MUf is marginal utility of food. The value of MUw when W=1 is 4 and value of MUf is 1 as derived from the utility function. Therefore MRSw,f = 4 which is a constant. Therefore the consumer is willing to give up 4 quantity of water to generate one additional quantity of food.1d) At the given budget constraint, the consumer optimum is that the consumer ends up buying 4 units of water and 1 unit of food. The slope of unconcern curve the slope of budget constraint. We get the corner solution. The graph is given belowThe consumer optimum is given by MRS= Pw/Pf. The MRS is 4 and the ratio of prices is 1. Therefore the marginal rate of substitution is not same as that ratio of prices. This is because th e goods water and food in question are perfect substitutes. Here the consumer buys in extremes. He either buys 4units of water or 1 unit of food. With the given income of 4, he buys 4unit of water and 0 unit of food.To get the Marshallian demands for x2 and y2 where x2 is the quantity of X good purchased by consumer 1 and y2 is the quantity of Y good purchased by consumer2, we set up a Lagrangian function Z= u(x,y) l(Px.X+Py.Y-M2) where l is the lambda i.e lagrangian multiplier.2c) Suppose there are deuce consumers in the market. For consumer 1 the demand curve is P= a-b Q1 and for consumer 2 the demand curve is P= c-dQ2 where a,b,c,d are constant. To get the market demand curve we occupy to solve the individual demand curve first. For Consumer 1 the demand is Q1= (a-P)/b and for consumer 2 the demand is Q2= (c-P)/d. The market demand is Q= Q1+Q2. Therefore Q= (a-P)/b +