Loise spends £20 on tea (T) and coffee (C). Her preferences for these goods can be described by the following utility function: U(T, C) = 2T + C² − C (MU₁ = 2, MUc = 2C − 1). Suppose that one cup of tea costs £1.60 while one cup of Loise's favourite coffee costs £4.00. a) Find Loise's optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning. b) Discuss how Loise's optimal consumption choice would change when her disposable budget changes. c) If the price of tea increases to £2.00 per cup, how should the price of coffee change so that Loise can be as well off as before this change in prices? d) Discuss the implications of the price change from c) on Loise's optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Loise's demand for tea and/or coffee.
Loise spends £20 on tea (T) and coffee (C). Her preferences for these goods can be described by the following utility function: U(T, C) = 2T + C² − C (MU₁ = 2, MUc = 2C − 1). Suppose that one cup of tea costs £1.60 while one cup of Loise's favourite coffee costs £4.00. a) Find Loise's optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning. b) Discuss how Loise's optimal consumption choice would change when her disposable budget changes. c) If the price of tea increases to £2.00 per cup, how should the price of coffee change so that Loise can be as well off as before this change in prices? d) Discuss the implications of the price change from c) on Loise's optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Loise's demand for tea and/or coffee.
Microeconomics A Contemporary Intro
10th Edition
ISBN:9781285635101
Author:MCEACHERN
Publisher:MCEACHERN
Chapter6: Consumer Choice And Demand
Section: Chapter Questions
Problem 2QFR
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