3 Olivia's preferences over books and plants aregiven by U (b, p) = bp2 where books are $2 eachand plantsare $6 each. Her income is $90.(a) What is Olivia's optimal bundle?(b) Suppose the price of plants increases to $8.What is Olivia's new optimal bundle? Draw adiagramshowing the price change, labeling all interceptsand optimal points. Put plants on thehorizontal.(c) Find the income and substitution effects fromthe price change for both goods. Show them onyourgraph.(d) What type of goods are books and plants forOlivia?Page 3

Introduction Utility function of Olivia has given. U(b , p ) = bp2 Here b stand for books and p…

Olivia's preferences over books and plants are given by U (b, p) = bp2 where books are $2 each and plants are $6 each. Her income is $90. (a) What is Olivia's optimal bundle? (b) Suppose the price of plants increases to $8.

Olivia's preferences over books and plants are given by U (b, p) = bp2 where books are $2 each and plants are $6 each. Her income is $90. (a) What is Olivia's optimal bundle? (b) Suppose the price of plants increases to $8.

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Chapter1: Making Economics Decisions

Section: Chapter Questions

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Question

Olivia's preferences over books and plants are
given by U (b, p) = bp2 where books are $2 each
and plants
are $6 each. Her income is $90.
(a) What is Olivia's optimal bundle?
(b) Suppose the price of plants increases to $8.
What is Olivia's new optimal bundle? Draw a
diagram
showing the price change, labeling all intercepts
and optimal points. Put plants on the
horizontal.
(c) Find the income and substitution effects from
the price change for both goods. Show them on
your
graph.
(d) What type of goods are books and plants for
Olivia?
Page 3

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