Answer to Question #259413 in Microeconomics for shemore

Question

 A consumer’s weekly income is $5000, the price of a cell phone is $1250, and the price of a watch is $500. What quantity of cell phones and watches will maximize the consumer’s utility if they spend their entire weekly income on cell phones and watches? Explain your answer using marginal analysis.                        I.          Suppose that this consumer’s income elasticity for watches is 5.4. what does this indicate about watches? If the cross-elasticity calculates to 0.8 what does this indicate about the relationship between watches and cell phones?

Answer 1

When whole the income of the consumer will be spend on the mobile phone and watch then the consumer will able to get maximum satisfaction. The maximum number of cellphone a consumer will buy with is 4 with this income. The maximum number of watches a consumer will buy is 10. This amount of watches and cellphone a consumer will buy if he spends the whole amount on the purchase of cell phone and watches. 

When the cross price elasticity is 5.4 this means that the cross price elasticity is greater than 1. This means that the quantity supplied will be more than quantity demanded. This means there is elastic demand under which the demand of the goods and services will not change. As this is not the necessity good due to which the increase in the price of this will change the demand of the watch and cellphone. 

When the cross price elasticity is less than 1 that means the demand is not very sensitive to price. This means the change in price will not change the demand of the goods and services. The demand will remain same for the goods. The given cross elasticity is 0.8 which is less than 1 this shows that the demand will be there for the good no matter the increase or decrease in price.  

Hence, it is not easy for all the consumers to buy more goods and services if they have less income.