Consumer theory Problem Sets - Essay Example

This means that the consumption of other goods will go down to meet the same level of expenditure on the utility. Suppose the rich, who are taxed to provide benefits to the poor, derive utility from seeing the poor consume certain goods (g in our discussion). It is easy to see that in this case, the optimal in-kind transfers’ welfare dominate cash transfers (Laura, 2003, p.513). Assume the rich and the poor have preferences that are represented by: 2) From the question we learn of two consumers with different consumption levels shown by the different utility functions they have.

Using the above graph we can find the consumption levels of the different customers. (a) Depict the indifference curve of consumer A for the utility level of 36 in a (x1A; x2A) diagram. From the graph below we can observe that the intercept for the demand curve for consumer A is point p. d) In the process of the derivation of the goods XD1 and XD2, we need to look into the constants and in this case it is k and l. The graph below is used in finding the solutions for the demand of goods XD1 and XD2. e) In the derivation of the optimal demand and labour, we take a look at the demand levels of labour and try to work out the hourly rate.

In working out the daily rate we look into labour as the most important factor. g) Economy wide supply of labour and capital. When we take a look at consumer A and B we notice that the two consumers have different consumer and capital needs. To understand the supply of labour and capital we need to interpret the graph below. h) Equilibrium conditions necessary for the creating a perfect equilibrium depend on the factors derived in the graph. These factors are: good wages while demand for labour must be low and the labour demand supply to be high. i) The supply of goods 1 and good 2 can be derived using the laws on forces of demand and supply.

We see that the supply of the goods depends on