Question 3 Liam has a utility function U(x1, x2) = min(2x1, x2). Liam consumes two goods: bicycles (x1) and bicycle tires (x2). For every bicycle he owns, he needs exactly two tires. The price of a bicycle is $100, and the price of a tire is $30. Liam's monthly budget is $300. A) How many bicycles and tires will Liam demand? Restrictions: Now, assume that due to new import restrictions, the price of a tire increases to $50, while the price of bicycles and Liam's income remain unchanged. B) How many bicycles and tires will Liam demand now? C) How does the price increase affect Liam's ability to satisfy his consumption needs? Is he worse off compared to before the restriction?
Question 3 Liam has a utility function U(x1, x2) = min(2x1, x2). Liam consumes two goods: bicycles (x1) and bicycle tires (x2). For every bicycle he owns, he needs exactly two tires. The price of a bicycle is $100, and the price of a tire is $30. Liam's monthly budget is $300. A) How many bicycles and tires will Liam demand? Restrictions: Now, assume that due to new import restrictions, the price of a tire increases to $50, while the price of bicycles and Liam's income remain unchanged. B) How many bicycles and tires will Liam demand now? C) How does the price increase affect Liam's ability to satisfy his consumption needs? Is he worse off compared to before the restriction?
Chapter10: Consumer Choice Theory
Section: Chapter Questions
Problem 3P
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Transcribed Image Text:Question 3
Liam has a utility function U(x1, x2) = min(2x1, x2). Liam consumes two goods: bicycles (x1) and
bicycle tires (x2). For every bicycle he owns, he needs exactly two tires. The price of a bicycle is
$100, and the price of a tire is $30. Liam's monthly budget is $300.
A) How many bicycles and tires will Liam demand?
Restrictions: Now, assume that due to new import restrictions, the price of a tire increases
to $50, while the price of bicycles and Liam's income remain unchanged.
B) How many bicycles and tires will Liam demand now?
C) How does the price increase affect Liam's ability to satisfy his consumption needs? Is he
worse off compared to before the restriction?
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