Charlie Consumes Apples and Bananas

question 13

Multiple Choice

Charlie consumes apples and bananas. His utility function is U(X_A, X_B) = x_Ax²_B. The price of apples is $1 the price of bananas is $2, and his income is $30 per week. If the price of bananas falls to $1

• A) Charlie demands fewer apples and more bananas.
• B) the substitution effect of the fall in banana prices reduces his apple consumption, but the income effect increases his apple consumption by the same amount.
• C) the substitution effect of the fall in the price of bananas reduces his banana consumption but the income effect increases his banana consumption by enough so that his banana consumption rises.
• D) the income used to calculate the substitution effect is higher than his original income, since the change made Charlie better off.
• E) More than one of the above is true.

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Definitions:

Return on Investment

A measure of the profitability and efficiency of an investment, calculated as net profit divided by the cost of the investment.

Selling Price

The price at which a product or service is sold to the customer.

Split-off Point

is the stage in a process where multiple products are derived from the same materials or process and each becomes separately identifiable.

Joint Processing Costs

Expenses incurred during the process of producing multiple products from a common input or process before they are split into separate products.