The Wong family consumes 3 pounds of fish and 5 pounds of chicken per month. The price of fish is $8 per pound and chicken is $4 per pound
a. What is the amount of income allocated to fish and chicken consumption?
b. What is the price ratio (the price of fish relative to the price of chicken)?
c. Explain the meaning of the price ratio you computed.
d. If the Wongs maximize utility, what must the ratio of the marginal utility of fish to the marginal utility of chicken be equal to?
e. If the price of chicken rises, will the Wong family consume more chicken, less chicken, or the same amount of chicken? Explain your answer using the rule of equal marginal utility per dollar.
What will be an ideal response?
a. Income = $44
b. Price of fish / price of chicken = $8 / $4 = 2
c. To buy a pound of fish the family has to give up 2 pounds of chicken.
d. MUfish / MUchicken = Price of fish / Price of chicken = $8 / $4 = 2
e. If the price of chicken rises, the marginal utilities per dollar will not be equal. Specifically, MUfish / Price fish > MUchicken / Price chicken. The family can raise its total utility by buying less chicken and more fish.
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