o help with his busy schedule, Joe drinks a lot of cappuccinos. In particular, his weekly demand for cappuccinos is: cap = 0.1 M -8 Pcap Where Xcap is the number of cappuccinos drunk per week, M is Joe's weekly income and Pcap is the price of a cappuccino. Note that Xcop is an average demand and need not be a whole number). a) Suppose that income M = 240 euro, and the price is Pcap = 1.5 euro. How many Cappuccino, on average, will Joe drink per week? Suppose that the price increases to Pcap = 1.6 eura. b) What is Joe's new demand for cappuccinos? What is his total change in demand due to the price change? C) Given the new price (Pcap = 1.6), how much extra income would Joe need to allow him to continue buying the number of Cappuccinos calculated in part (a), without needing to reduce his demand other goods? (In other words, how much would Joe's expenditure on cappuccinos have gone up if he had continued to buy the number of cappuccinos calculated in part (a)?)
o help with his busy schedule, Joe drinks a lot of cappuccinos. In particular, his weekly demand for cappuccinos is: cap = 0.1 M -8 Pcap Where Xcap is the number of cappuccinos drunk per week, M is Joe's weekly income and Pcap is the price of a cappuccino. Note that Xcop is an average demand and need not be a whole number). a) Suppose that income M = 240 euro, and the price is Pcap = 1.5 euro. How many Cappuccino, on average, will Joe drink per week? Suppose that the price increases to Pcap = 1.6 eura. b) What is Joe's new demand for cappuccinos? What is his total change in demand due to the price change? C) Given the new price (Pcap = 1.6), how much extra income would Joe need to allow him to continue buying the number of Cappuccinos calculated in part (a), without needing to reduce his demand other goods? (In other words, how much would Joe's expenditure on cappuccinos have gone up if he had continued to buy the number of cappuccinos calculated in part (a)?)
Chapter4: Utility Maximization And Choice
Section: Chapter Questions
Problem 4.2P
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Transcribed Image Text:To help with his busy schedule, Joe drinks a lot of cappuccinos. In particular, his weekly demand for cappuccinos is:
cap = 0.1 M-8 Pcap
Where Xcap is the number of cappuccinos drunk per week, Mis Joe's weekly income and Pcap is the price of a cappuccino.
(Note that Xcop is an average demand and need not be a whole number).
(a) Suppose that income M = 240 euro, and the price is Pcap = 1.5 euro. How many Cappuccino, on average, will Joe drink per week?
Suppose that the price increases to Pcap = 1.6 euro.
(b) What is Joe's new demand for cappuccinos? What is his total change in demand due to the price change?
(c) Given the new price (Pcap = 1.6), how much extra income would Joe need to allow him to continue buying the number of Cappuccinos calculated in part (a), without needing to reduce his demand
other goods? (In other words, how much would Joe's expenditure on cappuccinos have gone up if he had continued to buy the number of cappuccinos calculated in part (a)?)
(d) Compute the change in Joe's demand for cappuccinos that is due to the substitution effect.
(e) What is the change in Joe's demand for cappuccinos due to the income effect?
Are cappuccinos a normal or an inferior good for Joe (justify your answer in a sentence or two)?
A BI
a)
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