EXERCISE 6 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
EXERCISE 6 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
Chapter10: Consumer Choice Theory
Section: Chapter Questions
Problem 8P
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Transcribed Image Text:EXERCISE 6
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.
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