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

question 27

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 $11 per week and was paying a price of $4 per pair of earrings, then if the price of earrings rose to $8, the compensating variation of that price change (measured in dollars per week) would be closest to

• A) $4.89.
• B) $17.60.
• C) $18.60.
• D) $8.80.
• E) $16.60.

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Definitions:

Probability

A measure of the likelihood or chance that a particular event will occur, expressed as a number between 0 and 1.

Expected Total Utility

The sum of satisfaction or benefit that an individual expects to receive from consuming goods or services.

Probability

A measure of the likelihood of a particular event occurring, often expressed as a fraction or percentage.

Expected Income

The amount of money one anticipates receiving over a certain period, taking into account various income sources and factors.