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Author Question: Lisa consumes only pizzas and burritos. In equilibrium, her marginal utility of pizza is 20 and her ... (Read 207 times)

jjjetplane

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on: Jul 1, 2018
Lisa consumes only pizzas and burritos. In equilibrium, her marginal utility of pizza is 20 and her marginal utility of a burrito is 10. The price of a pizza is 4. What is the price of a burrito?
 
  What will be an ideal response?

Question 2

Lisa consumes only pizzas (P) and burritos (B). Her utility function is U = P0.5 B0.5. The price of per pizza is 10 and the price per burrito is 5. In equilibrium, Lisa consumes 4 pizzas. Using Lisa's utility function, calculate how many burritos she consumes.
 
  What will be an ideal response?
Microeconomics ¦ Perloff ¦ 8th Edition
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stallen

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Reply #1 on: Jul 1, 2018
Answer to Question 1

In equilibrium, the ratio of the marginal utility of a pizza divided by the price of a pizza must equal the marginal utility of a burrito divided by the price of a burrito. Thus, the price of a burrito must be 2.

Answer to Question 2

The marginal utility of pizza equals B0.5/2P0.5. The marginal utility of a burrito equals P0.5/2B0.5. In equilibrium, the ratio of the marginal utilities will equal the ratio of prices. The ratio of marginal utilities simplifies to B/P. The ratio of prices is 10/5. Since we know that Lisa consumes 4 pizzas, she must consume 8 burritos.


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