uestion 3 - ONLY NEED DIAGRAM / ANSWER FOR PART II (C) i. Douglas allocates his budget of $24 per week to 3 goods, cereal, books and clothing. Use the table below to answer the following question Quantity Total Utility of Cereal Total Utility of Books Total Utility of Clothing 1 50 75 25 2 90 135 45 3 120 175 60 4 140 205 70 5 155 225 78
Question 3 - ONLY NEED DIAGRAM / ANSWER FOR PART II (C)
i. Douglas allocates his budget of $24 per week to 3 goods, cereal, books and clothing. Use the table below to answer the following question
|
Quantity |
Total Utility of Cereal |
Total Utility of Books |
Total Utility of Clothing |
|
1 |
50 |
75 |
25 |
|
2 |
90 |
135 |
45 |
|
3 |
120 |
175 |
60 |
|
4 |
140 |
205 |
70 |
|
5 |
155 |
225 |
78 |
a. If the price of cereal is $2, the price of books is $3 and the price of clothing is $1, at what point does Douglas maximize his utility?
ii. Robinson makes $200 a week and spends his entire income on running shoes and basketball shorts.
a. Write down the algebraic expression for his budget constraint if running shoes and basketball shorts cost $20 each. How many of each good will he buy?
b. Write down the algebraic expression for Mr. Robison’s budget constraint if the price of basketball shorts rises to $30 each. How many of each good will he buy?
c. Illustrate the results in parts (a) and (c) and provide a decomposition of the income and substitution effect.
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