(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.c., compensating variation]
(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.c., compensating variation]
Chapter7: Consumer Choice: Maximizing Utility And Behavioral Economics
Section: Chapter Questions
Problem 4WNG
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Question
Only part B please. Thanks!
Transcribed Image Text:3. 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 cach 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.c., compensating
variation]](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fc3585354-64d7-4f4a-b055-4a9b75b3799d%2F1b9bc89d-4eb1-464c-bee2-24ee620254d1%2Fygbi6ou_processed.png&w=3840&q=75)
Transcribed Image Text:(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.c., compensating
variation]
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