If Ginna spends her entire budget, she could buy a chosen set of groceries and also buy 10 notebooks. If she spends only half of her budget, she could only buy a set of groceries and could not afford any notebooks. Suppose Ginna's budget is £150. Her preferences for groceries (G) and notebooks (N) can be described by the following utility function: U (G, N) = 30G + 2N (MUG = 30, MUN = 2). a) Find Ginna's optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning, b) Discuss how the price of a notebook should change for Ginna to change her optimal consumption choice. c) If the price of a notebook increases by 50%, how should the price of the groceries drop so that Ginna can be as well off as before this change in prices? d) Discuss the implications of the price change from c) on Ginna's optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Ginna's demand for groceries and/or notebooks.

If Ginna spends her entire budget, she could buy a chosen set of groceries and also buy 10 notebooks. If she spends only half of her budget, she could only buy a set of groceries and could not afford any notebooks. Suppose Ginna's budget is £150. Her preferences for groceries (G) and notebooks (N) can be described by the following utility function: U (G, N) = 30G + 2N (MUG = 30, MUN = 2). a) Find Ginna's optimal consumption bundle. Provide both algebraic and graphical solution. Explain your reasoning, b) Discuss how the price of a notebook should change for Ginna to change her optimal consumption choice. c) If the price of a notebook increases by 50%, how should the price of the groceries drop so that Ginna can be as well off as before this change in prices? d) Discuss the implications of the price change from c) on Ginna's optimal choice. In your discussion, include the analysis of the substitution and income effects as well as Ginna's demand for groceries and/or notebooks.

Microeconomics A Contemporary Intro

10th Edition

ISBN:9781285635101

Author:MCEACHERN

Publisher:MCEACHERN

Chapter6: Consumer Choice And Demand

Section: Chapter Questions

Problem 2QFR

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