Author Question: A farmer lives on a flat plain next to a river. In addition to the farm, which is worth F, the ... (Read 78 times)

nelaaney · **on:** Jul 1, 2018

A farmer lives on a flat plain next to a river. In addition to the farm, which is worth F, the farmer owns financial assets worth A. The river bursts its banks and floods the plain with probability P, destroying the farm.

If the farmer is risk averse, then the willingness to pay for flood insurance unambiguously falls when A) F is higher, and A is lower.
B) P is lower, and F is higher.
C) F & A are higher.
D) P is lower, and A is lower.
E) A is higher, and F is lower.

Question 2

The local mall has a make-your-own sundae shop. They charge customers 35 cents for each fresh fruit topping and 25 cents for each processed topping. Barbara is going to make herself a sundae.

The total utility that she receives from each quantity of topping is given by the following table: Fresh Fruit Topping Processed Topping of Units Total Utility of Units Total Utility 1 10 1 10 2 18 2 20 3 24 3 10 4 28 4 0 5 30 5 -10 6 28 6 -20 7 24 7 -30 8 18 8 -40 9 10 9 -50 10 -6 10 -60 a. What is the marginal utility of the 6th fresh fruit topping? b. Of the two toppings, which would Barbara purchase first? Explain. c. If Barbara has 1.55 to spend on her sundae, how many fresh fruit toppings and processed toppings will she purchase to maximize utility? d. If money is no object, how many fresh fruit toppings and processed toppings will Barbara purchase to maximize utility? e. Which of the basic assumptions of preferences are violated by preferences shown in the table above?

aprice35067 · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

E

Answer to Question 2

a. The marginal utility of the 6th fresh fruit topping is -2 utils (28 utils - 30 utils).
b. Barbara will purchase the topping that provides the largest marginal utility per dollar spent. The marginal utility divided by price for the first unit of fresh fruit topping is 10/.35. The marginal utility divided by price for the first unit of processed topping is 10/.25. Thus the first topping purchased will be processed (because 10/.25 > 10/.35).
c. Barbara will continue to purchase toppings, one at a time, until she spends 1.55, by always selecting the topping that provides the largest marginal utility per dollar spent. Barbara will purchase 2 processed toppings first, followed by 3 fresh fruit toppings.
d. If money is no object, Barbara will purchase an additional unit of each topping as long as the topping provides a positive marginal utility. In this case, 2 processed toppings and 5 fresh fruit toppings.
e. The preferences used in this problem violate the assumption that consumers always prefer more of a good to less.