a) Jamal\'s budget is $12. In order for Jamal to maximize his utility, how many

Question

a) Jamal's budget is $12. In order for Jamal to maximize his utility, how many eclairs and cream puffsshould he buy?

b) Suppose the price of an eclair increase to $6. Jamal's income does not change and neither does the priceof a cream puff. What combination of eclairs and cream puffs will Jamal buy now?

c) Using your answers to parts (a) and (b), derive two points on Jamal's demand curve for eclairs

Explanation / Answer

a) Let eclairs be denoted as E cream puffs as C. Let us examine different combinations of E and C 5 E is not possible as cost ($15) exceeds budget of $12. 4 E is possible and and cost = $12. none C. So, U = 414 +0 = 414 3 E is possible, cost = $9 . So, C = 2, cost $3, U = 342+103.5 = 445.5 2 E is possible, cost = $6. So, C = 4, cost $6. U = 243 + 177 = 420 Hence, E=3 and C= 2 gives max U (and is the choice of Jamal)= 445.5 (ANSWER) b) If price of E is $6 and rest remains same as in (a). U for 0 E + 8 C can not be computed as U for C= 8 is not given. U for 1 E + 4 C = 126+177 = 303 U for 2 E + 0 C = 243 Hence 1 E + 4 C , U = 303 is the choice of Jamal. (ANSWER) c) Let demand eqn. for eclairs be - E = aP + b 3 = a*3 +b 1 = a*6 +b so, (3-1) = a*(3-6) + 0 = -3a => a = - 2/3 => b = 3 + 2 = 5 Hence, E = -2/3 P + 5 WE USUALLY PLOT P ON Y AXIS AND Q ON X AXIS AND PTS. ARE DENOTED AS (X,Y) The 2 points are (E =1, P=6) and (E=3, P=3) (ANSWER)

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