Question567Fix a consumption bundle 9 X CR with 90. We will use this consumption bundle as a reference point.We want to define a function that measures how many units of this reference consumption bundle g a consumer is willing to give up in order to move from some utility level y to some consumption bundle z E X.Such function may be useful in the con of development economics of societies in which one commodity (e.g., rice) is a natural reference commodity already.It is also of conceptual significance as it helps us to understand the consumer problem as a problem of maximizing the difference between benefits and costs.To this end, for reference consumption bundle g E X, g 0, and utility level u, define the benefit function by b(x, y) = max{ ER: u(1-8g) =u,x-Bg EX} if x-Bg E X, u(x – Bg) =u for some 6 otherwise a.Let’s try first to understand this function graphically by assuming L= 2. Consider first Figure 1 (a).It depicts an indifference curve representing a utility level u and a reference consumption bundle g.Further, it depicts b, the number of units of g the consumer is willing to give up to move from the indifference curve representing u to the consumption bundle z.Explain now what happens in Figure 1 (b). QUESTION 1 Having seen the success ofUber, you have decided to start a similarcompany in Davis, which you wil… Show more… Show more QUESTION 1 Having seen the success ofUber, you have decided to start a similarcompany in Davis, which you wil… Show more… Show moreMathStatistics and Probability BUSINESS 220
