Ellsworth\'s utility function is U(x; y) = minfx; yg. Ellsworth has $150 and the

Question

Ellsworth's utility function is U(x; y) = minfx; yg. Ellsworth has
$150 and the price of x and the price of y are both $1. Ellsworth's boss is thinking of sending
him to another town where the price of x is $1 and the price of y is $2. The boss o ers no
raise in pay. Ellsworth, who understands compensating and equivalent variation perfectly,
complains bitterly. He says that although he doesn't mind moving for its own sake and the
new town is just as pleasant as the old, having to move is as bad as a cut in pay of $a. He
also says he wouldn't mind moving if when he moved he got a raise of $b. What are a and b?

Explanation / Answer

*Cannot understand the utility function

Taking utility function as U(x,y) = min(x,y)

Earlier budget function: x + y = 150

Changed budget function: x + 2y = 150

With earlier budget function, x=y (according to the utility function)

=> x=y=75 (putting in budget function)

With new budget function, to consume the same he would need 75 + 2(75) = 225

Thus it is like reduction of $75 of his income.

If he want to remain on the same utility function if his income is increased by $75

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.