EXERCISE 5Loise spends £20 on tea (T) and coffee (C). Her preferences for these goods can be described by the following utility function: ( , ). Suppose that one cup of tea costs £1.60 while one cup of Loise’s favourite coffee costs £4.00.Find Loise’s optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning.Discuss how Loise’s optimal consumption choice would change when her disposable budget changes.If the price of tea increases to £2.00 per cup, how should the price of coffee change so that Loise can be as well off as before this change in prices?Discuss the implications of the price change from c) on Loise’s optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Loise’s demand for tea and/or coffee.

Consumer L is choosing between tea (T) and coffee (C). Consumer L derives utility from the…

Answered: Loise spends £20 on tea (T) and coffee…

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter10: Consumer Choice Theory

Section: Chapter Questions

Problem 6P

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EXERCISE 5

Loise spends £20 on tea (T) and coffee (C). Her preferences for these goods can be described by the following utility function: ( , ). Suppose that one cup of tea costs £1.60 while one cup of Loise’s favourite coffee costs £4.00.

Find Loise’s optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning.
Discuss how Loise’s optimal consumption choice would change when her disposable budget changes.
If the price of tea increases to £2.00 per cup, how should the price of coffee change so that Loise can be as well off as before this change in prices?
Discuss the implications of the price change from c) on Loise’s optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Loise’s demand for tea and/or coffee.

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