Re: Isi peb 2016

Posted by knowpraveen on Apr 27, 2016; 7:55am
URL: http://discussion-forum.276.s1.nabble.com/Isi-peb-2016-tp7600058p7600092.html

Pure intuition and some graph. Coming to the first question, for I=1 and R=0, the equations are going to E+B=1 for E<=1/2 and 2E+B=1 otherwise. Its easier to understand the budget line from this. The budget line generally would be E+B=I-R for E<=1/2 and 2E+B=I-R otherwise.

Taking this further now, for I=1 and R=0 case, there wouldn't be a case of E>1/2 since we go off limits by exceeding the budget. So, the budget equation remains for E<=1/2 and the utility attains maximum when E is maximum ie. 1/2. So, the utility turns out to be 3/2

You can draw the graph on your own and see for yourself.

The third part, the budget equations are going to look like this - E+B=2 for E<=1/2 and 2E+B=1.5 otherwise (do a bit of back-of-the-envelope calculation, you will come up with this) So here the optimal bundle is going to be (E,B)=(0.5,1.5)

Correct me if I'm wrong. Thanks =)