Suppose the figure to the right illustrates the average level of happiness with
ID: 1135087 • Letter: S
Question
Suppose the figure to the right illustrates the average level of happiness with life across income classes for a particular country. Assume that satisfaction resulting from income can be measured with a cardinal index and that this index is measured on the figure's vertical axis.
According to this information, happiness _ with income at _ rate. If so, then this suggests that the marginal utility of spending an extra dollar on a consumption good will _
A consumer purchased 10 units of good X and 6 units of good Y in year 1 (the base period) when the price of good X was $8 and the price of good Y was $5. The next year (year 2) the price of X fell to $7 and the price of Y increased to $8.
Set the Laspeyres price index in year 1 equal to 100. Then the Laspeyres price index in year 2 is
(Enter your response as a real number rounded to one decimal place.)
Based on the Laspeyres price index, inflation between year 1 and year 2 waspercent.(Enter your response as a real number rounded to one decimal place.)
The consumer says that if she could afford to purchase 11 units of X and 4.5 units of Y at the prices in year 2, she would be just as well off as she was in year 1. Based on this information, the ideal cost-of-living index for this consumer is
(Enter your response as a real number rounded to one decimal place.)
10 8- S 6 3 5 2- 0 250,000 500,000 750,000 1,000,000 Income (annual $)Explanation / Answer
According to the information provided in the graph, happiness increases with income at a decreasing rate. If so, then this suggests that the marginal utility of spending an extra dollar on a consumption good will decrease.
The explanation for this is as follows:-
As income increases, happiness (satisfaction with life) also increases as also reflected by the upward sloping curve. The positive slope of the curve along with the information provided in the graph clearly indicates that as income increases, happiness increases.However, the rate at which this income increases is declining as also indicated by the concave shape of the curve. This implies that the marginal utility of spending an extra dollar of consumption good is declining. This is because, assuming that income earned is spent on consumption good, An additional unit of income earned will lead to increased quantity of consumption good, but at a declining rate as happiness associated with income is increasing at a decreasing rate.
Based on the above explantaton, the blanks in the question above are filled in as follows:-
According to the information provided in the graph, happiness increases with income at a decreasing rate. If so, then this suggests that the marginal utility of spending an extra dollar on a consumption good will decrease.
Laspeyres price index measures change in prices between base year and successive time period taking quantities of the base year period as weights
Laspeyres price index= Pn Q0/ P0 Q0
Commodity
Price in Year 1 (Base Year) (P0)
Quantity in Base Year (Q0)
Price in Year 2
(P1)
P0Q0
P1Q0
X
8
10
7
80
70
Y
5
6
8
30
48
P0 Q0= 110
P1 Q0= 118
Laspeyres price index is 100 in Year 1
Hence, Laspeyres price index = P1 Q0/ P0 Q0
Thus, inflation between Year 1 and Year 2 is 7.3%
Based on the above , the blanks in the question above are filled in as follows:-
Set the Laspeyres price index in year 1 equal to 100. Then the Laspeyres price index in year 2 is 107.3. Based on the Laspeyres price index, inflation between year 1 and year 2 was 7.3 percent.
If the consumer purchases 11 units of X and 4.5 units of Y at the prices in year 2, she would spend $113
Commodity
Price in Year 2
(P1)
Quantity in Year 2 (Q1)
P1Q1
X
7
11
77
Y
8
4.5
36
P1 Q1= 113
Price index in base year is 100
Cost of living index is 113
Based on this information, the ideal cost-of-living index for this consumer is 113.
Commodity
Price in Year 1 (Base Year) (P0)
Quantity in Base Year (Q0)
Price in Year 2
(P1)
P0Q0
P1Q0
X
8
10
7
80
70
Y
5
6
8
30
48
P0 Q0= 110
P1 Q0= 118
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