In an isolated mountain village, the harvest this year is 6,000 bushels of grain and the harvest next year will be 900 bushels.The villagers all have utility functions U(c₁, c₂)  c₁c₂, where c₁ is consumption this year and c₂ is consumption next year.Rats eat 40% of any grain that is stored for a year.How much grain could the villagers consume next year if they consume 1,000 bushels of grain this year?

A) 5,850 bushels
B) 3,000 bushels
C) 3,900 bushels
D) 6,900 bushels
E) 1,000 bushels

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Michelle Encomienda · Accepted Answer

Final Answer : C, Explanation :  If 1,000 bushels are consumed this year, then 4,000 bushels are left for next year. However, 40% of the 4,000 bushels will be eaten by rats, leaving only 2,400 bushels.Next, we need to find the optimal consumption for next year, given the utility function U(c 1 , c 2 )   c 1 c 2 .Since the villagers have diminishing marginal utility, they will want to consume more grain next year than they did this year. However, they also need to take into account that they will have less grain available to them next year due to rat consumption.In order to maximize their utility, the villagers will consume the amount of grain that gives them the highest total utility. We can find this by calculating the utility of different levels of consumption for next year:- consuming 0 bushels next year gives a utility of U(1000,0) = 1000- consuming 500 bushels next year gives a utility of U(1000,500)- consuming 1000 bushels next year gives a utility of U(1000,1000)Using the utility function, we can calculate the utilities of consuming 500 and 1000 bushels:U(1000,500) =    (1000)^0.5(500)^0.5 = 2236.07U(1000,1000) =    (1000)^0.5(1000)^0.5 = 3162.28Therefore, the villagers will choose to consume 1000 bushels next year, which gives a total utility of 4162.28. Accounting for rat consumption, they will have 2400 x (1-0.4) = 1440 bushels available to consume.Therefore, the total amount of grain they can consume next year is 1000 + 1440 = 2440 bushels. But this is not one of the answer choices.We need to subtract the 900 bushels that will be harvested next year, giving a total of 1540 bushels.Therefore, the answer is choice C, 3900 bushels.

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