Suppose Paul, a 3rd grader, has the following utility function over his lunch of Twinkles (t) and soda (s), utility = U(t, s) = √ts (a) If Twinkles cost $0.10 each and soda costs $0.25 per can, how must Paul spend the $1.00 from his parents in order to maximize his utility? (b) Now suppose the school tries to discourage Twinkle consumption by increasing the price to $0.40, by how much will Paul's parents have to increase his lunch allowance in order for him to preserve his utility level in (a)? [i.e., compensating variation]

Suppose Paul, a 3rd grader, has the following utility function over his lunch of Twinkles (t) and soda (s), utility = U(t, s) = √ts (a) If Twinkles cost $0.10 each and soda costs $0.25 per can, how must Paul spend the $1.00 from his parents in order to maximize his utility? (b) Now suppose the school tries to discourage Twinkle consumption by increasing the price to $0.40, by how much will Paul's parents have to increase his lunch allowance in order for him to preserve his utility level in (a)? [i.e., compensating variation]

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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