Income and substitution effects Consider a consumer that orders her preferences according to the following utility function defined over pizza p and beer b u(b,p) = bp The price of a bottle of beer equals 2 dollars per bottle, and the price of a pizza equals 10 dollars per pizza. Suppose the consumer's income equals 100 dollars. a. Write down the consumer's optimal consumption problem. b. How many pizzas does the consumer buy? How many bottles of beer? c. Let bottles of beer be on the y-axis. Plot your solution and draw the budget line in black ink. Label the optimal bundle with the letter "O." Suppose, now, that the price of beer decreases to 1 dollar per bottle. d. Suppose that the consumer is compensated for the decrease in the price of beer with sufficient money so that she can just barely afford the consumption bundle that she initially purchased before the price decrease. What would her new income be? e. How many bottles of beer and pizzas does the c
2 Income and substitution effects Consider a consumer that orders her preferences according to the following utility function defined over pizza p and beer b u(b,p) = bp The
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