If a consumer buys only Goods F and C, then at least one of them should be a normal good

QUESTION

1. If a consumer buys only Goods F and C, then at least one of them should be a normal good. Explain whether this statement is true, false or uncertain2. Consider the two-period inter-temporal consumption model. Supposing that both present and future consumption are normal goods, evaluate the following story:Jacob is planning to borrow money from a bank and then discovers that the interest rate is now higher.a. Describe Jacob’s initial plan (before he discovers a rise in the interest rate) on a diagram taking present consumption on the horizontal axis [Note: You are asked to describe Jacob’s utility maximizing behavior].b. If Jacob takes out a loan from the bank under the higher interest rate, will the loan be larger or smaller than what he had planned earlier (i.e. his planned loan described in Part (a))? Use the following two terms in your explanation: substitution effect; income effect. [Note: The loan here means what Jacob will have to repay in the future.]c. Would he necessarily be better off borrowing money (even after he discovered a rise in the interest rate) rather than depositing money at the bank? Explain.3. Tak is a computer whiz who spends $1800 each year to buy computer equipment: PCs and monitors. PCs and monitors areperfect,one-for- one complements and they each cost $300.a. How many PCs and monitors does he buy? Describe the situation on adiagram, taking PCs on the horizontal axis.Now suppose an increase in the price of PCs: say a PC costs $600.b. On the same diagram, demonstrate income and substitution effects for this price change.c. Calculate the compensating variation for this price change.d. Calculate the equivalent variation for this price change.4. Mar spends her income (I) on bread (B) and all other goods (AOG). The price of the bread is $3 per loaf. Suppose the Government offers her non-tradable bread stamps that are worth $60. Bread stamps can be used only to purchase bread. Under this policy, it turns out she chooses a bundle where her marginal rate of substitution of bread for (the expenditure on) all other goods is 2 (dollars). Would she be better off with $60 in cash than with the bread stamps? If yes, explain why. Otherwise, explain why not. Use a diagram (or diagrams) taking loaves of bread on the horizontal axis and the expenditure on all other goods on the vertical axis.5. You are a risk-averse person who has M dollars of income. You face the following gamble. A fair coin will be flipped. If a “Head” appears you win $150 but if a “Tail” appears you lose $50.a. Draw your utility function on a diagram taking income on the horizontal axis. Identify the income level M and the corresponding level of utility on the diagram. Also identify on the diagram (i) the expected value of income if you choose to take the gamble and (ii) the expected utility of taking the gamble.b. Will you choose to pursue this gamble? Explain carefully why or why not. [Hint: The diagram you drew in Part (a) will help, but you may want to draw another diagram to fully discuss the point.]

ANSWER:

REQUEST HELP FROM A TUTOR