Suppose there are two goods, coffee (C) and tea (T). The consumption set is R2+, so both goods can be consumed in arbitrary non-negative quantities. Abdul owns 2000 grams of coffee but does not own any tea. He has no other wealth. The price of coffee is Pc = 2 (in Dhs per gram) and the price of tea is PT > 0 (in Dhs per gram). Abdul can sell coffee to earn income, which he can then use to buy tea or coffee. He can also throw coffee away (at no cost). Abdul's preferences can be represented by the utility function u(c; t) = -(800 - c)2 -(800 - t)2; where c is the quantity of coffee (in grams) and t is the quantity of tea (in grams). a) In separate diagrams, illustrate (i) the map of Abdul's indifference curves, (ii) Abdul's constraint set. b) How much coffee and tea does Abdul decide to consume when (i) PT = 2, (ii) PT = 3, and (iii) PT = 4? c) Illustrate Abdul's demand for coffee as a function of the price of tea (PT > 0) in an appropriate diagram.

Suppose there are two goods, coffee (C) and tea (T). The consumption set is R2+, so both goods can be consumed in arbitrary non-negative quantities. Abdul owns 2000 grams of coffee but does not own any tea. He has no other wealth. The price of coffee is Pc = 2 (in Dhs per gram) and the price of tea is PT > 0 (in Dhs per gram). Abdul can sell coffee to earn income, which he can then use to buy tea or coffee. He can also throw coffee away (at no cost). Abdul's preferences can be represented by the utility function u(c; t) = -(800 - c)2 -(800 - t)2; where c is the quantity of coffee (in grams) and t is the quantity of tea (in grams). a) In separate diagrams, illustrate (i) the map of Abdul's indifference curves, (ii) Abdul's constraint set. b) How much coffee and tea does Abdul decide to consume when (i) PT = 2, (ii) PT = 3, and (iii) PT = 4? c) Illustrate Abdul's demand for coffee as a function of the price of tea (PT > 0) in an appropriate diagram.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter4: Utility Maximization And Choice

Section: Chapter Questions

Problem 4.14P

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