Suppose pizza(P) and hamburger(H) are perfect substitutes for Andy. He is always willing to substitute two pizzas for one hamburge (b) The price of pizza is pP = $2 per pizza and the price of hamburger is pH = $2 per hamburger.What is Andy’s optimal consumption bundle if his income level is $30? (c) To promote the sale of pizza, now the owner of the pizza restaurant decides to give out the first two pizzas to every consumer for free, and af- terwards, if the consumer wants more, the consumer will still pay at the price of pP = $2 per pizza. If the price of hamburger and Andy’s income are same as before,draw Andy’s budget line. What is Andy’s optimal con- sumption bundle in this case? (d) Now,to promote the sale of pizza, instead of giving out the first two pizzas for free, the owner of the pizza restaurant decides to lower the price of pizza to $0.8 per pizza. Given price of hamburger and Andy’s income remain the same as before, what is Andy’s optimal consumption budle now? Compare with part(b),what are the subsitution effects and income effects for pizza and hamburger? If substitution effect or income effect on any one of these two goods is zero, give an explanation for why it is zero. Is pizza a normal good and why? Is Hamburger a normal good and why?
Suppose pizza(P) and hamburger(H) are perfect substitutes for Andy. He is always willing to substitute two pizzas for one hamburge
(b) The
(c) To promote the sale of pizza, now the owner of the pizza restaurant decides to give out the first two pizzas to every consumer for free, and af- terwards, if the consumer wants more, the consumer will still pay at the price of pP = $2 per pizza. If the price of hamburger and Andy’s income are same as before,draw Andy’s budget line. What is Andy’s optimal con- sumption bundle in this case?
(d) Now,to promote the sale of pizza, instead of giving out the first two pizzas for free, the owner of the pizza restaurant decides to lower the price of pizza to $0.8 per pizza. Given price of hamburger and Andy’s income remain the same as before, what is Andy’s optimal consumption budle now? Compare with part(b),what are the subsitution effects and income effects for pizza and hamburger? If substitution effect or income effect on any one of these two goods is zero, give an explanation for why it is zero. Is pizza a normal good and why? Is Hamburger a normal good and why?
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