Howie Consumes Only Beer (B)and Donuts (D)each Week with His

question 34

Essay

Howie consumes only beer (B)and donuts (D)each week with his $100 income.Beer costs $1,while donuts cost only 50¢.Howie has Cobb-Douglas preferences given by:
U(B,D)= B(D-d)
where d is the quantity of donuts that his neighbor Nord consumes.Assume throughout this question that Howie always consumes more donuts than Nord.
a.How does Nord's beer consumption influence Howie's utility function? Specifically,compute and determine the sign of ∂U/∂d.Intuitively,what does this tell you about Howie's happiness and Nord's consumption of donuts?
b.Holding d fixed,compute Howie's optimal consumption bundle of Beer and Donuts as functions of Nord's consumption of donuts,d.
c.How does Nord's consumption of donuts affect Howie's optimal bundle? Specifically calculate and determine the sign of ∂B*/∂d and ∂D*/∂d where (B*,D*)is Howie's optimal consumption bundle.

---

Definitions:

Positive Emotions

Feelings that are enjoyable or pleasant to experience, such as happiness, joy, love, and excitement.

Divergent Thinking

A way of thinking or method employed to conjure up creative notions by scrutinizing an array of possible answers.

Convergent Thinking

A thought process that involves focusing on a single, optimal solution to a problem, often by applying logic and knowledge.

Intelligence Tests

Standardized tests designed to measure human intelligence, cognitive abilities, and potential to understand and process information.