softdorito
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I must be stupid and I need help. Can somebody explain to me the logic behind those answers? Number 3, why Home highest utility is at A (2 tv, 9 cars)? Why not 6 cars and 4 tvs or any other point on their PPF (same with Foreign)? And then in 4, why the **** their new utility is C? Why they decided to export 4 cars and not 5, 6, 7 or 8? :confused::confused:Image
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js93
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(Original post by softdorito)
I must be stupid and I need help. Can somebody explain to me the logic behind those answers? Number 3, why Home highest utility is at A (2 tv, 9 cars)? Why not 6 cars and 4 tvs or any other point on their PPF (same with Foreign)? And then in 4, why the **** their new utility is C? Why they decided to export 4 cars and not 5, 6, 7 or 8? :confused::confused:Image
The budget constraint (straight line) shows all the combinations that can be afforded by the individual. The Indifference curve shows preferences over those combinations. Where the indifference curve meets the budget constraint is dependent on personal preference, for example a persons ideal combination of two goods which he can afford. Don't get too hung up on why it is a particular number, it just demonstrates a preference and a question has to state some sort of starting combination.

In 4 when it is increased I suspect it is 4 because of a mathematical function over preferences, it is not determined by anything within the graph. Again, don't give it too much thought. Its just a graphical way of understanding how a budget function and a utility function can be combined, as it is not always that intuitive if you use mathematical formulas when learning.
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softdorito
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(Original post by js93)
The budget constraint (straight line) shows all the combinations that can be afforded by the individual. The Indifference curve shows preferences over those combinations. Where the indifference curve meets the budget constraint is dependent on personal preference, for example a persons ideal combination of two goods which he can afford. Don't get too hung up on why it is a particular number, it just demonstrates a preference and a question has to state some sort of starting combination.

In 4 when it is increased I suspect it is 4 because of a mathematical function over preferences, it is not determined by anything within the graph. Again, don't give it too much thought. Its just a graphical way of understanding how a budget function and a utility function can be combined, as it is not always that intuitive if you use mathematical formulas when learning.
Ok, fair enough, so the numbers in 3 are given and that's how i know where to draw a utility function. But how do I solve question 4 in that case? How do I know where to draw utility function? If home specializes in cars, then it produces 12 cars (point b) and how do I determine how many it will export?
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js93
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(Original post by softdorito)
Ok, fair enough, so the numbers in 3 are given and that's how i know where to draw a utility function. But how do I solve question 4 in that case? How do I know where to draw utility function? If home specializes in cars, then it produces 12 cars (point b) and how do I determine how many it will export?
For 4 I suspect the answer given is just an example an not necessarily the only one that would have been marked correctly. In the absence of any specific mathematical function, in most cases its safes just to choose a level sort of increase in both goods when the budget constraint shifts out.
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softdorito
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(Original post by js93)
For 4 I suspect the answer given is just an example an not necessarily the only one that would have been marked correctly. In the absence of any specific mathematical function, in most cases its safes just to choose a level sort of increase in both goods when the budget constraint shifts out.

Hm... I don't think they'd get just random values (well, semi-random since new utility must be higher up than the previous one), there has to be math behind this.

I was trying to solve this with the Cobb-Douglas, but I have troubles with finding budget constraint, because I'm not operating with money. What I came up with so far is (since Home has 4 workers and 1 worker can produce either 2 TV or 3 cars), then budget constraint equals:

4 = (1/3)*x + (1/2)*y
MRS = px/py
MRS = (1/3)/(1/2) = 2/3
3x = 2y
1.5x = y

4 = (1/3)*x + (1/2)*[(3/2)*x]
4 = 1/3x + 3/4x
4 = x
6 = y

This is why 3rd didn't make sense to me, but ten we agreed that in 3rd the numbers are given...

But I still am clueless about solving the 4th :confused:
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