Charlie's utility function is x A x B .The price of apples used to be $1 per unit and the price of bananas was $2 per unit.His income was $40 per day.If the price of apples increased to $2.25 and the price of bananas fell to $1.25, then in order to be able to just afford his old bundle, Charlie would have to have a daily income ofA) $57.50.B) $116.C) $28.75.D) $86.25.E) $230.

Question

Adesola Obisesan · Accepted Answer

Final Answer : A, Explanation :   To determine the new income required to afford the old bundle, we calculate the cost of the old bundle at the new prices. Let's assume Charlie used to buy   x x x   apples and   y y y   bananas. At the old prices,   1 x + 2 y = 40 1x + 2y = 40 1 x + 2 y = 40  . We don't know the exact quantities of apples and bananas, but we know the total cost. At the new prices, the cost of the same quantities would be   2.25 x + 1.25 y 2.25x + 1.25y 2.25 x + 1.25 y  . To find the new income required, we substitute the old quantities into the new price equation, but since we don't have the quantities, we can't directly calculate this. However, the correct approach involves understanding that the new income must cover the increased cost of apples and the decreased cost of bananas. Given the choices, only one reflects a plausible adjustment in income to cover the increased cost of apples (which has more than doubled) and the decreased cost of bananas. Without the exact quantities, we can't calculate directly, but we can infer that the correct answer must account for a significant increase in income to maintain the same consumption bundle, making A the most plausible choice based on the information provided and the need for a substantial increase in income to afford the old bundle at the new prices.

Definitions

Learning Objectives

Learning Objectives

Related questions