Bernice in Problem 5 Has the Utility Function U(x, Y)

question 6

Multiple Choice

Bernice in Problem 5 has the utility function u(x, y) = min{x, y}, where x is the number of pairs of earrings she buys per week and y is the number of dollars per week she has left to spend on other things. (We allow the possibility that she buys fractional numbers of pairs of earrings per week.) If she originally had an income of $18 per week and was paying a price of $8 per pair of earrings, then if the price of earrings rose to $14, the compensating variation of that price change (measured in dollars per week) would be closest to

• A) $12.
• B) $25.
• C) $7.20.
• D) $24.
• E) $23.

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Definitions:

Real GDP

Gross Domestic Product adjusted for inflation, measuring the value of goods and services produced by a country in real terms.

Base Year

A specific year against which economic growth is measured, serving as a standard comparison for financial indices and economic data.

Economic Activity

All actions that involve producing, trading, selling, and buying goods and services within an economy.

Final Good

A product that is consumed directly by the end-user or customer and will not be used to produce any further goods or services.