An individual derives utility from consuming "all other goods," g,and clean air (measured by the reduction in particulate matter per m³),a,as measured by the utility function U(g,a)= g^0.6a^0.4.The price of consumer goods equals $20 and the price of clean air (abatement)equals $10.What is the slope of the Engel curve when income increases from $100 to $200? A) The slope is 25. B) The slope is -25. C) The slope is zero. D) The slope is infinite.

Question

Quizplus · Accepted Answer

The slope of the Engel curve is equal to the marginal utility of goods divided by the marginal utility of clean air, multiplied by the ratio of the price of clean air to the price of goods. When income increases from $100 to $200, the marginal utility of goods decreases and the marginal utility of clean air increases. Therefore, the slope of the Engel curve becomes steeper, which means that the individual will consume more goods and less clean air as income increases.

An Individual Derives Utility from Consuming "All Other Goods," G,and