Carlos Consumes Only Two Goods, Apples and Bananas

question 45

Multiple Choice

Carlos consumes only two goods, apples and bananas.His utility function is U(a, b) = a³b².Before he trades, his initial endowment is w_a apples and w_b bananas.After he trades to his optimal consumption point at these prices, the relative prices change.Carlos is allowed to make further trades if he wishes.

• A)Carlos will definitely be better off after the price change.
• B)Carlos will be better off if the price of the good he was selling goes up and worse off if the price of the good he was selling goes down.
• C)Unless the prices of both goods goes down, we cannot tell if Carlos is better off or worse off.
• D)Carlos will be better off if the price of the good he was selling goes down and worse off if the price of the good he was selling goes up.
• E)Carlos's utility will not be affected by the change.

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Definitions:

Indifferent

A state of having no preference or being neutral between two or more options as they provide the same level of utility or satisfaction.

Prizes

Awards or rewards given for a specific achievement, often used as incentives in competitions or contests.

Interest Rates

The cost of borrowing money, typically expressed as a percentage of the amount loaned, paid to the lender at regular intervals for the use of their money.

Bond Prices

The market value of a bond, which can fluctuate based on interest rates, the bond’s credit quality, and other factors.