Author Question: The price of leisure A) is the same for everyone. B) depends on the number of hours worked. C) ... (Read 37 times)

burchfield96

  • Hero Member
  • *****
  • Posts: 610
The price of leisure
 
  A) is the same for everyone.
  B) depends on the number of hours worked.
  C) is measured as foregone earnings.
  D) is immeasurable.

Question 2

Suppose the typical consumer only purchases food and clothing, and her utility can be expressed as U=FC. Currently, food costs 5 per unit and clothing costs 2 per unit. Her income is 70. If the price of food increases to 6, compare the resulting Laspeyres price index with a true cost of living index.
 
  What will be an ideal response?


mbcrismon

  • Sr. Member
  • ****
  • Posts: 328
Answer to Question 1

C

Answer to Question 2

Maximizing utility subject to the initial constraint (5F + 2C = 70 ) yields C/F = 5/2 or F = 7 and C = 17.5. The Laspeyres price index calculates the ratio of the income necessary to achieve the original bundle relative to the original income. In this case, (6  7 ) + (2  17.5 )/70 = 1.10. The true cost of living index calculates the ratio of the income necessary to achieve the original level of utility relative to the original income. Utility is held constant when C  F = 17.5  7 = 122.5. The consumer is on the new budget line when C/F = 3. Combining yields F = 6.39 and C = 19.17. At the new prices, this requires an income of 76.68 and a resulting cost of living index of 76.68/70 = 1.095.



Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
 

Did you know?

Elderly adults are at greatest risk of stroke and myocardial infarction and have the most to gain from prophylaxis. Patients ages 60 to 80 years with blood pressures above 160/90 mm Hg should benefit from antihypertensive treatment.

Did you know?

According to the FDA, adverse drug events harmed or killed approximately 1,200,000 people in the United States in the year 2015.

Did you know?

Calcitonin is a naturally occurring hormone. In women who are at least 5 years beyond menopause, it slows bone loss and increases spinal bone density.

Did you know?

Stroke kills people from all ethnic backgrounds, but the people at highest risk for fatal strokes are: black men, black women, Asian men, white men, and white women.

Did you know?

Essential fatty acids have been shown to be effective against ulcers, asthma, dental cavities, and skin disorders such as acne.

For a complete list of videos, visit our video library