Suppose that the preferences a typical American has for quantities of electricity (E) and gasoline (G) is given by U(E,G) = a ln(E) + (1 - a) ln(G) where 0 < a < 1
Suppose the prices of gasoline and electricity in the units provided are both $1/unit and the consumer has an income of $100. Suppose in addition, the government has chosen to ration electricity by allowing a maximum consumption of 50 units of electricity (E ? 50). a. If a = .25, find the optimal consumption bundle of gasoline and electricity. Does the electricity rationing constraint have an influence on consumer's choice? b. If a = .75, find the optimal consumption bundle of gasoline and electricity. Does the electricity rationing constraint of the government have an influence on the consumer?
For each case, the best approach is to solve while ignoring the rationing constraint. If the solution you find violates the constraint, you know then that the optimal bundle will be where E = 50.
a. The MRS = .25G/.75E = 1 = MRT or simply G = 3E. Using the budget constraint:
E + 3E = 100
Solving gives E = 25 and G = 75. The electricity rationing does not have an effect.
b. The MRS = .75G/.25E = 1 = MRT or simply G = E/3. The solution from the budget constraint is E = 75. However, this violates the rationing constraint and so E = 50, G = 50.
You might also like to view...
Economists use the phrase "business cycle" when referring to fluctuations in:
a. real GDP. b. the chain price index. c. the consumer price index. d. the general level of prices.
Which of the following best describes the traditional political use of tariffs?
a. protection of borders b. protection of military secrets c. protection of exchange rates d. protection of vested economic interests
Consider the market for nurses in a given city. In each of the following cases, explain what happens to the equilibrium wage rate and the quantity of nurses hired
a. One of the major hospitals in the city closes. b. A record number of students graduate with bachelor's degrees in nursing. c. Traditionally, nursing is a field that attracts women. However, changes in access to education and to the labor force participation rate by women have led to a greater demand for the services of women in a wide range of occupations. The demand for nurses, however, does not change. d. Advances in medical technology reduce the amount of time physicians must spend with patients in intensive care and increase the time that nurses spend with patients.
Now that Social Security payments are indexed the:
A. nominal value is adjusted to maintain a constant real value. B. real value is adjusted to maintain a constant nominal value. C. payments are adjusted so retirees can buy more with their payments over time. D. payments are not adjusted enough, so retirees can buy less with their payments over time.