Milo spends £27 on stamps (S) and maple candy (C). His preferences for these goods are given by the following utility function: U(S,C) = min (S, 3C). Suppose that price per unit of S is £1.1 and the price per unit of C is £2.1. a) Write down Milo's budget equation and draw the corresponding budget line. Clearly label the axes and calculate the coordinates of the points of intersection of the budget line with each axis. In your graph, indicate the consumption bundle of 12 stamps and 6 maple candies. Can Milo afford this bundle? Explain. b) Find Milo's optimal consumption bundle, both algebraically and graphically. Explain your reasoning. c) If the price of a stamp increases to £1.4, how should Milo's income change for him to be as well off as before this change in prices? d) Discuss the implications of the price change from c) on Milo's optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Milo's demand for stamps and/or maple candy.
Milo spends £27 on stamps (S) and maple candy (C). His preferences for these goods are given by the following utility function: U(S,C) = min (S, 3C). Suppose that price per unit of S is £1.1 and the price per unit of C is £2.1. a) Write down Milo's budget equation and draw the corresponding budget line. Clearly label the axes and calculate the coordinates of the points of intersection of the budget line with each axis. In your graph, indicate the consumption bundle of 12 stamps and 6 maple candies. Can Milo afford this bundle? Explain. b) Find Milo's optimal consumption bundle, both algebraically and graphically. Explain your reasoning. c) If the price of a stamp increases to £1.4, how should Milo's income change for him to be as well off as before this change in prices? d) Discuss the implications of the price change from c) on Milo's optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Milo's demand for stamps and/or maple candy.
Chapter10: Consumer Choice Theory
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:Milo spends £27 on stamps (S) and maple candy (C). His preferences for these goods are
given by the following utility function: U(S, C) = min (S, 3C). Suppose that price per unit
of S is £1.1 and the price per unit of C is £2.1.
a)
Write down Milo's budget equation and draw the corresponding budget line.
Clearly label the axes and calculate the coordinates of the points of intersection of
the budget line with each axis. In your graph, indicate the consumption bundle of
12 stamps and 6 maple candies. Can Milo afford this bundle? Explain.
b) Find Milo's optimal consumption bundle, both algebraically and graphically.
Explain your reasoning.
c) If the price of a stamp increases to £1.4, how should Milo's income change for him
to be as well off as before this change in prices?
d) Discuss the implications of the price change from c) on Milo's optimal choice. In
your discussion, include the analysis of the substitution and income effects as well
as Milo's demand for stamps and/or maple candy.
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