Currently, Paula is maximizing utility by purchasing five TV dinners (T) and four Lean Cuisine Meals (L) each week. Suppose both T and L cost $5 each. a. Graph Paula’s initial utility-maximizing choice. b. Suppose the price of T falls by $1 and the price of L rises by $1.25. Can Paula still afford to buy her initial consumption choices? What do you know about her new budget constraint? c. Make a new graph to show why Paula will choose to consume more T and less L given her new budget constraint to maximize utility. Is her utility increased, decreased, or unchanged given the price change? [Hint: try to make the graph as big as possible to see how the utility is tangent/intersects with the lines more easily]
Currently, Paula is maximizing utility by purchasing five TV dinners (T) and four Lean Cuisine Meals (L) each week. Suppose both T and L cost $5 each. a. Graph Paula’s initial utility-maximizing choice. b. Suppose the price of T falls by $1 and the price of L rises by $1.25. Can Paula still afford to buy her initial consumption choices? What do you know about her new budget constraint? c. Make a new graph to show why Paula will choose to consume more T and less L given her new budget constraint to maximize utility. Is her utility increased, decreased, or unchanged given the price change? [Hint: try to make the graph as big as possible to see how the utility is tangent/intersects with the lines more easily]
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Currently, Paula is maximizing utility by purchasing five TV dinners (T) and four Lean
Cuisine Meals (L) each week. Suppose both T and L cost $5 each.
a. Graph Paula’s initial utility-maximizing choice.
b. Suppose the price of T falls by $1 and the price of L rises by $1.25. Can Paula still
afford to buy her initial consumption choices? What do you know about her new budget
constraint?
c. Make a new graph to show why Paula will choose to consume more T and less L
given her new budget constraint to maximize utility. Is her utility increased, decreased,
or unchanged given the price change? [Hint: try to make the graph as big as possible to
see how the utility is tangent/intersects with the lines more easily]
Cuisine Meals (L) each week. Suppose both T and L cost $5 each.
a. Graph Paula’s initial utility-maximizing choice.
b. Suppose the price of T falls by $1 and the price of L rises by $1.25. Can Paula still
afford to buy her initial consumption choices? What do you know about her new budget
constraint?
c. Make a new graph to show why Paula will choose to consume more T and less L
given her new budget constraint to maximize utility. Is her utility increased, decreased,
or unchanged given the price change? [Hint: try to make the graph as big as possible to
see how the utility is tangent/intersects with the lines more easily]
d. In part (b), suppose another scenario where the price of T rises by $1 and the price
of L falls by $1.25. Is Paula’s utility increased, decreased, or unchanged given the price
change?
of L falls by $1.25. Is Paula’s utility increased, decreased, or unchanged given the price
change?
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