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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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