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Midterm Exam 1

Midterm Exam 1

Q 1. Rachal enjoys only hot dogs (h)and soft drinks(s) , and the two items provides her a utility of =utility = U(h,s) =hs a.(5pts) If hot dogs cost$ 2 each and soft drinks cost $4per cup, how should Rachel spend her$8 income to maximize her utility? b.(5 pts) if the price of hot dogs increases to $8 each ,by how much should Rachel's income increase to provide her with the same level of utility she received in part (a)?

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Your Answer: a. MUh=s MUs=h MRS=s/h=2/4=1/2 2h+4s=8 s=1 h=2 b. u=1*2=2=hs MRS=s/h=8/4=2 s=2 h=1 8h+4s=I=16