Amy is the founder of a small IT firm that specializes in social networking applications. She meets weekly with the members of h
1 answer:
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Answer:
Remain the same
Explanation:
......................................................... (1)
ICS = Income in College Station = $6,000
CSpx = Price of x in College Station = 1
CSpy = Price of y in College Station = 5
ID = Income in Dallas = ?
Dpx = Price of x in Dallas = 4
Dpy = Price of y in Dallas = 5
Step 1
Assume that Jane always divides his income in College Station equally into two, i.e. $3,000 each, to buy x and y, the quantities of x and y he can buy in College Station can be calculated by dividing the $3,000 by the prices of x and y. This is calculated as follows:
CSqx = Quantity of x in College Station = $3,000 ÷ 1
= 3,000 units
CSqy = Quantiy of y in College Station = 3,000 ÷ 5
= 600 units
Jane's utility in College Station can be calculated by amending equation (1) and substituting 3,000 units for x and 600 units for y as follows:
= 3,000 * 360,000
CSU(3000, 600) = 1,080,000,000 utils .......................... (2)
Step 2
Since Jane is guaranteed a salary in Dallas with which he would be able to buy exactly what he buys in College Station, this implies that the salary in Dallas will make him to be able to buy 3,000 units of good x and 600 units of good which he currently buys in College Station.
Since
CSpx = 1, which is less than Dpx = 4
But
CSpy = 5, is equal to Dpy = 5
We need to calculate how much his Income will increase in Dallas to be able to buy 3,000 units of good x in Dallas given that its price is $4. Therefore, his income will increase by multiplying $4 by 3000 units and deduct $3,000 he was spending in College Station on x as follows:
IID = Increase in Income in Dallas = (3,000 * $4) - $3,000
= $12,000 - $3,000
= $9,000
Therefore, ID (Income in Dallas) is the addition of IDD and ICS (Income in College Station) calculated as:
ID = IID + ICS
= $9,000 + $6,000
= $15,000
Conclusion
With the ID of $15,000, Jane will be spending $12,000 to buy 3,000 units of good x in Dallas and continue to spend $3,000 to buy 600 units of good y in Dallas.
This will make Jan's utility in Dallas (DU) to be equal to 1,080,000,000 utils as obtained in equation (2) above.
Therefore, Jane's utility will remain the same based on the tangency rule which states that a consumer will choose a combination of two goods at which an indifference curve is tangent to the budget line, i.e. his income.