Suppose there are two goods, co ee (C) and tea (T). The consump- tion set is R2 +, so both goods can be consumed in arbitrary non-negative quantities. Abdul owns
Suppose there are two goods, co ee (C) and tea (T). The consump-
tion set is R2
+, so both goods can be consumed in arbitrary non-negative
quantities.
Abdul owns 2000 grams of co ee but does not own any tea. He has
no other wealth. The price of co ee is pC = 2 (in Dhs per gram) and
the price of tea is pT > 0 (in Dhs per gram). Abdul can sell co ee to
earn income, which he can then use to buy tea or co ee. He can also
throw co ee away (at no cost).
Abdul's preferences can be represented by the utility function
u(c; t) = -(800 - c)2 - (800 - t)2;
where c is the quantity of co ee (in grams) and t is the quantity of tea
(in grams).
(a) In separate diagrams, illustrate (i) the map of Abdul's indi erence
curves, (ii) Abdul's constraint set.
(b) How much co ee and tea does Abdul decide to consume when (i)
pT = 2, (ii) pT = 3, and (iii) pT = 4?
(c) Illustrate Abdul's demand for co ee as a function of the price of tea (pT > 0) in an appropriate diagram.
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