Rita has a budget of £600 to spend on theatre tickets (X) and on restaurant meals (Y). Each theatre ticket is priced at £60 (denoted by Px), whereas the price of a restaurant meal (Py) is £30. Her utility function is U(X,Y) = 8VX + Y, which gives marginal utilities MUX %3D 4 and MUy = 1. Her indifference curves are convex to the origin. VX (a) Find the equation of Rita's budget line. Explain how Rita decides to spend her budget with the aid of a diagram. (b) Find the number of theatre tickets and restaurant meals Rita purchases. (c) Rita receives a pay rise and so increases her budget for theatre tickets and restaurant meals to £660. Find the number of theatre tickets and restaurant meals Rita now purchases. (d) For Rita are theatre tickets and restaurant meals normal goods, inferior goods or not associated with income? (e) Suppose the price of restaurant meals falls. How do you expect Rita's demand for theatre tickets to change? Explain with reference to substitution and income effects.

Rita has a budget of £600 to spend on theatre tickets (X) and on restaurant meals (Y). Each theatre ticket is priced at £60 (denoted by Px), whereas the price of a restaurant meal (Py) is £30. Her utility function is U(X,Y) = 8VX + Y, which gives marginal utilities MUX %3D 4 and MUy = 1. Her indifference curves are convex to the origin. VX (a) Find the equation of Rita's budget line. Explain how Rita decides to spend her budget with the aid of a diagram. (b) Find the number of theatre tickets and restaurant meals Rita purchases. (c) Rita receives a pay rise and so increases her budget for theatre tickets and restaurant meals to £660. Find the number of theatre tickets and restaurant meals Rita now purchases. (d) For Rita are theatre tickets and restaurant meals normal goods, inferior goods or not associated with income? (e) Suppose the price of restaurant meals falls. How do you expect Rita's demand for theatre tickets to change? Explain with reference to substitution and income effects.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

How to do par d) and e)?

Rita has a budget of £600 to spend on theatre tickets (X) and on restaurant meals (Y).
Each theatre ticket is priced at £60 (denoted by Px), whereas the price of a restaurant
meal (Py) is £30. Her utility function is U(X, Y) = 8\X + Y, which gives marginal utilities
MUx
4
and MUy = 1. Her indifference curves are convex to the origin.
VX
(a) Find the equation of Rita's budget line. Explain how Rita decides to spend her
budget with the aid of a diagram.
(b) Find the number of theatre tickets and restaurant meals Rita purchases.
(c) Rita receives a pay rise and so increases her budget for theatre tickets and
restaurant meals to £660. Find the number of theatre tickets and restaurant
meals Rita now purchases.
(d) For Rita are theatre tickets and restaurant meals normal goods, inferior goods or
not associated with income?
(e) Suppose the price of restaurant meals falls. How do you expect Rita's demand
for theatre tickets to change? Explain with reference to substitution and income
effects.

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